The Bank of Japan just wrapped up its next-to-last meeting of the year, and the results showcased a mix of decisions. The regulator removed a strict upper limit on government bond yields, signaling a shift. On the flip side, the BoJ made sure that they're still committed to an accommodating policy.
This news didn't sit well with traders when it came to the Japanese yen. The USD JPY pair shot up by more than 140 points in a few hours, crossing the critical 150.00 level once again, which tends to provoke concerns within the Japanese government. However, even with this sudden surge, it's probably wise not to put too much faith in long positions. The risk of currency intervention grows with every point the USD JPY climbs above the 150.00 mark. We've seen this play out before in October when the pair danced with the 150.00 level a few times, driven by rising U.S. Treasury yields or an increase in market risk aversion. But each time, the price bounced back up, and the Japanese authorities didn't need to step in.
In case you missed the results of the October meeting, the Bank of Japan decided to take a more flexible approach to fluctuations in 10-year government bond yields. They've redefined the concept of the yield curve control ceiling to be more adaptable. The 1.0% target is no longer seen as a strict cap on Japanese Government Bond yields but more like a reference point.
The rest of the Bank of Japan's monetary policy remains unchanged: the interest rate on commercial bank deposits stays at a negative 0.1% per year, and the target yield for 10-year government bonds remains around 0.
Additionally, the Bank of Japan updated its economic forecasts. Notably, they raised their inflation outlook for this fiscal year, which concludes in March 2024. According to the revised data, the core consumer price index, excluding fresh food prices, is expected to increase by 2.8% this fiscal year, up from the earlier 2.5% forecast in July. They're sticking with a 2.8% inflation prediction for the following fiscal year, despite the earlier outlook pointing to a drop to 1.9%.
In the post-meeting discussion, Bank of Japan Governor Kazuo Ueda credited the change in the inflation forecast to the growth of the oil market and the more extended-than-anticipated effects of cost increases being passed on to consumers.
In his interview, Kazuo Ueda hinted that the bank might consider a shift away from its mild policy in the future, but only when they're closer to their 2% inflation goal. Given the updated economic forecasts and the recent data showing inflation hovering around 3%, it's fair to assume the Bank of Japan won't rush to make significant changes to its policy. The recent decision to adopt a more flexible yield curve control policy isn't necessarily a sign that the regulator is ready to move away from negative interest rates. In the end, the scales didn't tip in favor of the yen, resulting in a substantial uptick in the USD JPY pair.
