Japanese yen rebounds on BOJ purchases

The Japanese yen has posted gains on Thursday, putting the brakes on this week’s dollar rally of over 1%. In the European session, USD/JPY is trading at 133.64, down 0.60%.

This week has been marked by low liquidity, with many traders closing their books or taking a holiday at the end of the year. Japanese markets have been open all week, and USD/JPY has shown more movement than the other majors.

BOJ defends yield curve target

In a week that has been light on economic releases, the Bank of Japan has provided plenty of material for the markets. The BoJ shocked the markets last week when it widened the yield curve band on 10-year bonds, from 0.25% to 0.50%. The move had the same effect as a rate hike and sent the yen sharply higher. After the move, Governor Kuroda said that the tweak was aimed at making the yield curve more sustainable rather than removing it. Investors remain unconvinced, with speculation rising that the BoJ could raise the cap to 0.75% or eliminate its yield curve control altogether.

The BoJ has tried to dispel speculation that further changes to the yield curve are on the way. The Bank announced on Wednesday and again today unlimited bond purchases, with the aim of defending its yield curve target, which is around 0% for 10-year bonds. The tweak on the yield curve band did not affect this target, which the BoJ has insisted will remain in place. What we are seeing here is a continuation of a cat-and-mouse game between the BoJ and investors, with each side testing the resolve of the other. In October, the yen fell close to 152 before the Ministry of Finance intervened in the currency markets and propped up the yen.

Inflation is on the rise in Japan and has climbed to 3.7%, a 40-year high. The BoJ, however, remains unconvinced that inflation is sustainable unless accompanied by stronger wage growth. If labour agreements in early 2023 result in higher wages, the BoJ could raise its yield curve control target, which would be a massive change in policy.

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USD/JPY Technical

• USD/JPY tested support at 133.62 earlier. The next support level is 132.62
• There is resistance at 134.86 and 135.98

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