The Japanese yen experienced a decline subsequent to the Bank of Japan’s decision to maintain their existing ultra-loose policy settings, including the yield curve control (YCC) policy. The BOJ did, however, eliminate its forward guidance which had previously committed to maintaining interest rates at or below their current levels.
Prior to the announcement of the BOJ rate decision, there was a period of instability in the USD/JPY exchange rate. This was due to Nikkei’s report that the BOJ would not revise YCC but was contemplating modifying its forward guidance language concerning the potential for further policy easing.
USD/JPY 5-minute Chart
Prior to the meeting, market expectations were restrained due to the remarks made by Japan’s newly appointed central bank governor, Kazuo Ueda, during his inaugural press conference earlier this month. Ueda emphasized that there was no urgency to modify the ultra-accommodative policy settings, which includes yield curve control (YCC). Although some analysts anticipated adjustments in the forward guidance as a means of preparing markets for a possible withdrawal from its extensive stimulus measures.
The Bank of Japan (BOJ) has a history of providing unexpected developments. As a result, risk reversals for USD/JPY options with a one-week maturity have been strongly biased in favor of the Japanese yen. This implies that market participants anticipated hawkish outcomes. In December, the BOJ surprised financial markets by increasing the upper limit of its Yield Curve Control (YCC) band. Subsequently, in January, the bank kept the YCC band unchanged despite some expectations that it would be widened further.
USD/JPY 1-Week 25-Delta Risk Reversals
According to recent data, inflation in Japan has remained higher than the Bank of Japan’s target rate of 2%. Specifically, the consumer price index (CPI) decreased slightly from 3.3% in February to 3.2% on a year-over-year basis in March. The newly appointed governor has justified maintaining the current ultra-easy monetary policy by asserting that recent inflationary pressures are primarily due to cost-push factors and thus temporary in nature.
Ueda has recently stated that the economic, price, and financial trends should be taken into consideration when making significant changes to the YCC. However, he also advised the BOJ to avoid tardiness in normalizing monetary policy and to remain open to policy adjustments during the June meeting. Currently, attention is drawn towards upcoming events such as the US PCE price index data release, the US FOMC meeting on May 3rd and the ECB meeting on May 4th. The USD/JPY’s sustainability would rely on the Federal Reserve’s tone at its meeting next week.
USD/JPY Daily Chart
The directional movement of USD/JPY has been indeterminate on its technical charts in recent weeks. Nevertheless, the general outlook continues to display bearish tendencies, as previously indicated in recent reports such as “Time for the Japanese Yen to Rise? USD/JPY, EUR/JPY, AUD/JPY Ahead of BOJ” and “Japanese Yen Weekly Forecast: Bullish Triangle or Double Top for USD/JPY?” which were published on April 21 and April 17 respectively. Upon closer examination of smaller timeframes, the movement of USD/JPY seems to be influenced by various conflicting factors. The pair has demonstrated a minor inclination towards an upward trend since the conclusion of March. This is evident through the upward-sloping channel present on the 240-minute chart. However, in more recent times, it has deviated into a downtrend channel since mid-April.
USD/JPY 240-minute Chart
The direction of the pair’s movement may be horizontal unless it surpasses the horizontal trendline from March at approximately 135.00 or falls below the mid-April low of 132.00. If it decisively breaks above 135.00, it could potentially reach the March high of 138.00, but if it falls below 132.00, it could pose a risk of decline towards the January low of 127.20.