Yen edges lower after BoJ’s Ueda testimony

The Japanese yen is slightly weaker on Friday. In the European session, USD/JPY is trading just above the 135 line.

Ueda pledges to continue easy policy

Incoming Bank of Japan Governor Kazuo Ueda appeared at a parliamentary hearing on Friday and the markets were all ears. The buzz-word from Ueda was ‘continuity’, which really wasn’t a surprise. Ueda has already said that the current policy is appropriate and he maintained this stance at the hearing. Ueda said that ultra-low rates are needed while the economy is fragile and ruled out fighting inflation by tightening policy.

With inflation running at 4%, above the BoJ’s target of 2%, there is pressure on Ueda to abandon or at least adjust the Bank’s yield control policy (YCC), which is being criticised for distorting market functions. Ueda treated this hot potato with caution. He acknowledged that the YCC had caused side effects but said that the BoJ should evaluate whether recent steps such as widening the band around the yield target would ease these problems.

The takeaway from Ueda’s testimony is that he is in no hurry to shift central bank policy. Still, there is strong pressure on Ueda to address YCC, which is damaging the bond markets. Investors should not discount the possibility that Governor Kuroda could widen the target yield band at the March meeting in order to relieve pressure on Ueda. If Kuroda doesn’t act, the bond markets could respond with massive selling before Ueda takes the helm of the BoJ in April.

The inflation pressures facing the BOJ were underscored by National Core CPI for January, which rose from 4.0% to 4.2%. This was just shy of the 4.3% estimate, but still the highest reading since 1981. The BoJ has insisted that inflation is temporary (remember that line from the ECB and the Fed?), and is hoping that the government’s massive stimulus package, which includes subsidies for electricity, will help bring down inflation.

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USD/JPY Technical

• USD/JPY is testing resistance at 134.85. Above, there is resistance at 135.75
• 1.3350 and 131.90 are providing support

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