USD/JPY surges after BoJ maintains policy, inflation rises

• Bank of Japan maintains monetary policy
• BoJ removes forward guidance and announces policy review
• Tokyo Core CPI rises higher than expected
• USD/JPY soars

USD/JPY has jumped 1.3% today and is trading at 135.74. Earlier, the yen touched a low of 135.86, its lowest level since March 10th.

BoJ holds policy but changes guidance

Today’s Bank of Japan meeting was closely watched, as New Governor Ueda chaired his first meeting. As expected, there were no dramatic announcements about a shift in policy, but the yen still dropped sharply, as those investors that had hoped for a hint of monetary tightening in the short term were disappointed.

The BoJ announced that key policy settings will stay the same. Interest rates will remain at -0.10% and the yield curve control (YOC) scheme on 10-year government bonds will maintain a band of 0.50% on either side of the 0% target. There was no surprise here, as Ueda has stated on numerous occasions and again this week that he would not change these policy settings.

At the same time, the central bank modified its future guidance, removing its pledge to maintain rates at “current or lower levels”. The BoJ said it would “patiently continue with monetary easing” while saying it would conduct a broad review of monetary policy, which it expects to take one to one-and-half years.

The takeaway from the BoJ meeting is that the markets can expect more of the same in the short term, but there is the possibility of a shift in policy down the road. Ueda stated earlier in the week that if inflation and wage growth were to accelerate faster than expected, he would consider the possibility of tightening policy.  Ueda does not seem as glued to current policy as his predecessor Kuroda, but the new Governor is unlikely to make any moves absent a major change in economic conditions.

Ahead of the BoJ meeting there was an interesting note from Barclays which said that the yen could regain its status as a safe-haven currency, which has been taken over by the US dollar. Barclays said that if the BoJ normalizes policy and central banks cut rates due to a weak global economy, rate differentials would tighten and the yen would move higher. Barclays is projecting that the yen will rise to 123 by the end of next year, and the stronger currency could re-establish itself as a safe haven.

Overshadowed by the BoJ meeting, Tokyo Core CPI rose in April, an indication that high inflation is alive and well. The indicator rose from 3.2% to 3.5%, above the market consensus of 3.2%.

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USD/JPY Technical

• USD/JPY tested resistance at 135.85 earlier today. The next resistance line is 136.57
• 134.99 and 1.3427 are providing support

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