USD/JPY: Dollar/Yen Climbs After Bank of Japan Maintains Ultra-Easy Policy
- Shams ul Zoha
- January 18, 2023
- 4:42 pm
WHAT YOU SHOULD KNOW
- The Japanese Yen has increased in value following the Bank of Japan’s decision to maintain its yield curve tolerance band.
- The Bank of Japan has kept its interest rate steady at -0.1%, which has been the same since 2016.
- The Bank of Japan has introduced a new market operation tool to better control any increases in the rates.
The Japanese Yen has seen a sharp increase in value following the Bank of Japan’s decision to maintain its yield curve tolerance band. This has come as a surprise to many traders in the financial markets.
The Bank of Japan stated that the Japanese economy is anticipated to keep expanding at a rate higher than its potential growth rate.
The BOJ decided to keep its interest rate steady at -0.1%, which is in line with what was anticipated and has been the same since 2016.
At 05:08 GMT, the US Dollar to Japanese Yen exchange rate was 131.414, an increase of 3.255 or +2.54%.
At the close of trading on Tuesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) had a closing price of $72.78, a decrease of $0.19 or -0.26% from the previous day.
Prior to the Bank of Japan’s (BOJ) decision, there was much speculation about a potential alteration or termination of Japan’s yield curve control (YCC) policy. This was due to the fact that investors had pushed 10-year bond yields above the 0.5% ceiling set by the BOJ, and the amount of bond purchases to maintain this ceiling had become immense.
The Bank of Japan (BOJ) has implemented the Yield Curve Control (YCC) policy, which seeks to maintain a targeted short-term interest rate of -0.1% and a 10-year government bond yield of 0.5% above or below zero. This policy is intended to help the BOJ reach its goal of achieving a sustained inflation rate of 2%.si
Following the unexpected announcement, the yen experienced a sharp decline as investors reversed their previous expectations that the central bank would modify its yield control policy.
The Bank of Japan (BOJ) has demonstrated its commitment to maintaining the cap on long-term interest rates by introducing a new market operation tool to better control any increases in the rates.
The new regulations allow the central bank to extend up to 10 year loans to financial institutions, with both fixed and variable interest rates, provided that the loan is secured by collateral.
The Bank of Japan (BOJ) has stated that it will set the interest rate for each loan to create a yield curve that is in line with its market operations guidelines. This rate will be based on the market prices of Japanese government bonds for each maturity.
On Wednesday, Japanese government bond yields experienced their biggest drop in 20 years. This sharp decline occurred after the Bank of Japan decided to maintain its yield curve control policy. The yield had previously been capped at 0.5%.
The 10-year yield dropped 13 basis points to 0.37%, which is the largest one-day decrease since November 2003, and briefly fell to 0.36%. The Bank of Japan’s rate was 0.51% before they made their decision.
On Wednesday, Japanese government bond yields experienced a drastic decline, resulting in a larger spread between them and U.S. government bond yields. This shift has made the U.S. Dollar more appealing to investors in comparison to the Japanese Yen.
If the Bank of Japan had widened the range of its target interest rate or terminated its yield curve control policy, it would have had a similar effect as a rate hike, as yields would have increased.
Policymakers chose not to take this course of action, indicating that they did not wish to make the transition to a new governor more difficult following the retirement of Governor Haruhiko Kuroda in April.
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