Japanese Yen drops over 1% after BoJ meeting

• Japanese Yen weakens substantially following the Bank of Japan meeting early on Tuesday.
• The Yen returns to last week’s lows after Governor Ueda played down inflationary effects.
• USD/JPY returns to the 150s on the news. 

The Japanese Yen (JPY) is bleeding lower on Tuesday in the wake of the Bank of Japan (BoJ) policy meeting. The currency came under heavy pressure after Bank of Japan president Katsuo Ueda said inflation had mainly been caused by rising commodity prices, not secondary “demand-driven” factors. His remarks suggested the bank would retain an easy monetary policy as inflation had not become embedded enough to require tightening. 

The BoJ did nonetheless take the step of loosening its Yield Curve Control (YCC) mechanism – a move normally interpreted as hawkish. The YCC keeps the yield on the 10-year Japanese Government Bond (JGB) between 0.0% and 1.0%. On Tuesday, the BoJ redefined the ceiling as a “loose upper bound” rather than a “rigid cap”. The yield on the 10-year JGB is currently at 0.947%, having risen 0.055% due to the news.  

Daily digest market movers: Yen falls after Ueda plays down inflationary risks

• The Yen declines despite the BoJ deciding to tweak its YCC to allow greater flexibility.
• The BoJ raises its inflation forecast to 2.8% in 2023, the same in 2024 and only a reduction to 1.7% in 2025.
• The bank’s previous forecast had been for 2.5% inflation in 2023, 1.9% in 2024 and 1.6% in 2025.
• Despite upgrading its inflation expectations, the BoJ stressed price increases were more due to higher input costs and rising Oil prices rather than increased demand. This may explain why the Yen weakened rather than rose on the announcement.
• The Fed’s November 1 policy meeting will be another key event for USD/JPY. The Fed is unlikely to change interest rates – there is now zero chance of a raise and only a 1.8% chance of a rate cut of 0.25%, according to the CME Fedwatch tool, which uses Fed Funds Futures as a gauge of market expectations. 
• Investor’s focus is instead likely to be on what Federal Reserve Chairman Jerome Powell says in his press conference after the delivery of the official announcement. 
• If Powell emphasizes the likelihood that the policy rate could rise in the future or remain ‘higher for longer’ the market may buy the US Dollar, pushing USD/JPY back up. 
• If he emphasizes peak rate has been reached and the Fed is unlikely to raise at all during this cycle, then the opposite may be the case.
• Inflation pressures may be easing more than the data reflects, according to Stephen Schwarzman, the CEO and co-founder of investment fund Blackstone, who argues he has seen input costs in the companies in his portfolio increase 0% in Q3. This runs counter to the ‘hot inflation' argument propounded by some in the market. 
• Schwarzman added companies are making more profits off lower sales for lower base costs. 
• He added that “A third of CPI is shelter. A year ago, that was running at 12-13%, now it’s 1% – but the Fed averages the numbers so it isn’t showing yet…Inflation is actually lower than the numbers are saying.” 

Japanese Yen technical analysis: Decline reaches key trendline

USD/JPY executes an astounding volte-face and returns to its 12-month highs in the 150.70s, where it trades at the time of writing. 

The bias remains to the upside, with the next major target at the 152.00 highs achieved in October 2022. A re-break above last Thursday’s highs of 150.80 would provide fresh confirmation of a continued advance. 

US Dollar vs Japanese Yen: Daily Chart

Despite strong indications of a bearish technical reversal of the short-term trend and channel breakout on the 4-hour chart, just prior to the BoJ meeting, USD/JPY pivoted sharply and rose back up into its channel as a short-squeeze propelled prices higher.   

US Dollar vs Japanese Yen: 4-hour Chart

The Moving Average Convergence Divergence (MACD) indicator on the 4-hour chart crossed its signal line whilst below the zero line, giving a buy signal in line with the broader uptrend. This was a sign the recovery was underway. 

The medium-term and primary trends remain bullish, suggesting the odds favor higher highs and a continuation upwards.