- The Japanese yen fell by more than half a percent against major rival currencies after the adjustments made by the Bank of Japan to its policy settings disappointed market expectations that were looking for a stronger response to the country's higher-than-target inflation levels.
- In the case of the USD/JPY, it jumped to the 151.70 resistance level, its highest level in a year, from the 149.01 level in the same trading session.
- Concurrently, it is holding onto its gains ahead of the announcement of the US Federal Reserve today.
USD/JPY Still Strong
Meanwhile, the expectations were high that the Bank of Japan's decision would see another policy shift that would bring the central bank closer to the possibility of raising interest rates. Moreover, The Japanese newspaper Nikkei reported on Tuesday that the Bank of Japan would announce that it would allow yields on 10-year bonds to exceed the 1% ceiling. Also, the report sparked the appetite of yen buyers who see a significant rise in the currency if the Bank of Japan normalizes its policy settings. In this regard, Michael Wester, a forex analyst at Commerzbank, said that Market hopes were high that the Bank of Japan would at least give some indication of a future exit from the overly expansionary monetary policy.
Recently, the Bank of Japan voted unanimously to keep the negative interest rate and announced that the upper limit for yields on Japanese government bonds with a maturity of 10 years at 1% would be a "reference." This is not entirely clear for the higher bond yield system that the market may have been looking for. According to analysts, "the Bank of Japan was not entirely cooperative." The Bank of Japan's forecast for the full year 2024 core consumer price index was raised to 2.8% from 1.9% previously, a significant upgrade that would be consistent with expectations of higher Japanese interest rates, bond yields, and the yen. However, the full-year forecast for the core consumer price index for 2025 remained below the 2% target at 1.7%, suggesting that the bank is still not convinced of a sustainable rise in inflation to the target level.
Therefore, Commerzbank analysts say that the Bank of Japan seems reluctant to find a way out of its negative interest rate policy, which will ultimately keep the Japanese yen under pressure. They added: "The Bank of Japan has certainly stuck to its plan of not providing much clarity in its decisions with somewhat confusing communications regarding YCC."
YCC - or yield curve control - sees the Bank of Japan buying government bonds to create demand that will ensure that the yields of these bonds remain at what it considers to be reasonable levels (now considered to be "around" 1.0%). Ultimately, this ensures that the cost of money in Japan remains cheap, which helps to boost the economy. However, this is negative for the Japanese yen in a world where yields are rising. Obviously, this means that Japanese and international investors can earn higher returns elsewhere, putting downward pressure on the yen.
USD/JPY Outlook
The general upward trend of the US dollar against the Japanese yen (USD/JPY) is getting stronger and the technical indicators are moving towards strong overbought levels. As we mentioned before, caution still exists regarding the possibility of Japanese intervention in the markets to prevent further collapse of the currency, and if it happens, it may be exposed. Recently, USD/JPY is subject to strong and sharp selling, in which the trend may change to strongly bearish in a very short time. Currently, the closest resistance levels for the currency pair are 151.85, 152.30, and 153.00, respectively. Advocately, from the last two levels, we prefer to sell without risk. Technically, the current trend is awaiting the US Federal Reserve’s announcement today, then the US jobs numbers by the end of the week, be careful!
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