Thursday, July 26, 2018

Japanese yields, BoJ policy and the Yen

  • Dollar
  • Yen
  • Bank of Japan

Written by Konstantinos Anthis, Rawad Dagher

If we take a look at the central banks around the world we can notice some major changes in policy. For example, the Federal Reserve is tightening their monetary policy and the European Central Bank is planning to end quantitative easing by the end of the year. At the same time, the Bank of England is poised to raise interest rates again this summer. This has left the Bank of Japan the only major central bank without any changes planned.

On Monday, the BoJ reported that it could change its interest rate target and which pushed the 10-year Japanese government bond to 0.09%, moving almost 0.06% higher, its largest move in almost 2 years. BoJ was also forced to intervene in the bond market after the report agreeing to buy an unlimited amount of bonds up to 0.11%, in a bid to stabilize the market and push the yields back down. As a result, the USDJPY was able to break the long term support level of 111.20 trading all the way to the 110.75 area.
JP bonds

Looking ahead, the BoJ is holding a two-day meeting on July 30th and there are reports that officials are planning to revisit some of their policies. One of them might be altering its 10-year Japanese bond yield target of zero, which led the central bank to deploy a rarely used mechanism to stabilize government bond prices on Monday, as mentioned above.(FT)

Our main point - and major risk - here is that the Bank of Japan could move toward more tightening forcing the USDJPY to collapse. Should this be the case, the prices could move rapidly to the downside, with the next area of focus being the 109.50 level.