Japanese yen steadies after massive gains

The Japanese yen is unchanged on Wednesday, taking a pause after posting huge gains a day earlier. In the European session, USD/JPY is trading at 131.68.

BoJ yield move sends yen soaring

It was a day to remember for the Japanese yen, which gained a staggering 3.7% against the dollar. USD/JPY fell as low as 130.56, its lowest level since August. The yen’s upswing was triggered by the Bank of Japan, which stunned the markets by widening the yield control band to 50 basis points, up from 25 bp. The move, which was announced at the BoJ’s policy meeting, was completely unexpected as policy makers gave no hints of any changes prior to the meeting. The markets had assumed that any major policy moves would wait until after Governor Kuroda’s term ends in April.

The band for 10-year yields has widened, but it’s important to remember that yield curve control policy, although modified, remains in effect, as the target of 0% hasn’t changed. At a press conference after the meeting, Governor Kuroda insisted that the move was not an interest hike. This is technically correct, although the effect of the wider band is the same, as Japanese bonds can now pay higher interest rates since the cap on yields is higher.

Now that the dust has settled, the question is what’s next from the BoJ? The tweak to the yield control band can be viewed as a baby step towards normalisation, after decades of an ultra-loose monetary policy. There is now talk of the BoJ raising rates out of negative territory next year, which would mark a sea change in policy. The BoJ meets next in January, and the markets have priced in a rate hike at 22%.

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USD/JPY Technical

• USD/JPY has support at 131.13 and 130.15
•  There is resistance at 132.83 and 134.12

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