USD/JPY took traders for a ride over Bank of Japan

• USD/JPY whipsawed around BoJ mystery.
• It is likely speculation of another adjustment to YCC will build again in March.

USD/JPY is down some 0.2% as we head into Tokyo following a turbulent time over the past few session due to the Bank of Japan deliberations that resulted in a surprise for financial markets not knowing at first quite what to make of it. At the time of writing, USD/JPY is trading at 128.58 and has moved within a range of between 128.44 and 128.88. 

BoJ unravelled 

To unravel the mystery behind the Bank of Japan here, a number of insights from various banks make for informative reading. Firstly, analysts at Westpac summed up the BoJ event as follows: ''The BoJ opted to keep the 10yr JGB yield target range at +/-0.5%, made no change to short end rates or the outlook and while nudging up CPI forecasts slightly, still projected core inflation below the 2% target by 2024. This sparked a bounce in USD/JPY from 128.50 to as high as 131.58, later steadying around 130.75 as Governor Kuroda spoke. The decision to keep loose policy sparked a sharp rally in Japanese equities, the Nikkei 225 closing up 2.5%.''

Looking forward, the BoJ — despite many arguments to the contrary — is expected to initiate a monetary tightening in the near future that will significantly support the yen, analysts at Commerzbank argued: ''But especially if the BoJ tightens its monetary policy now, that argues for the yen to remain a low-interest rate currency (and thus arguably a safe haven, much like the Swiss franc and gold). Because it then becomes likely that Japan will also remain a special case in terms of its return to zero or low inflation.''

The next BoJ policy meeting is scheduled for March 10.  This will be the final meeting for Governor Kuroda. ''By the time the April BoJ meeting takes place, with the new governor in place, the outcome of the spring wage talks should be known.  Additionally, both January and February CPI inflation releases will have been printed, in addition to Japanese Q4 GDP and a range of activity indicators for the early part of this year. This suggests that any further widening in the YCC band could be delayed until April,'' analysts at Rabobank explained who argue that It is very unlikely that there will be an aggressive change in BoJ policy settings this year.

''It is likely speculation of another adjustment to YCC will build again in March, although we would expect the April meeting to be a more likely source of change.  Our 1 month USD/JPY130 forecast crudely reflects our view that both today’s and March’s policy meetings could bring steady policy,'' the analysts at Rabobank argued. ''That said, we forecast USD/JPY at 128 in a 3-month view and 126 in 6 months.''