Japan's Yen Dithers

The yen rambled while the Nikkei index increased on Tuesday once the Bank of Japan said

“it was relaxing the bounds of its control on yields, which analysts took as the first step towards dismantling the long-running and controversial policy.”

At first view, the policy announcement of the Bank of Japan appeared perfunctory and also caused a knee-jerk drop in the yen.

The Bank of Japan said that their 1% ceiling on the threshold 10-year yields may be an upper bound instead of a rigid cap. It kept maintaining its 0% target for those yields under the policy of the yield curve control.

“The Bank of Japan today de facto abolished YCC, and policymakers might call time on negative interest rates as soon as January,”

said the head of Asia-Pacific at Capital Economics, Marcel Thieliant.

“The tweak to the upper bound meant the BOJ will use the 1% ceiling as a reference point and no longer enforce it aggressively by buying bonds,”

Thieliant further said.

The reaction of the stocks was laced with confusion as well. Bank shares, which earlier rallied in the day on the prospect of higher rates, first dropped and then increased to leave the Topix banking index up by 2.4%.

The 10-year bond futures fell by around 0.46 points to 143.78 after the decision was announced, as the ten-year JGB yields increased six basis points to 0.95%.

While most of the analysts had predicted that there would be no change in the policy, the investors also were protectively positioning for some type of change in the YCC policy, which is increasingly appearing misplaced against the backdrop of the hawkish U.S Federal Reserve and improving the inflation and domestic growth.

“They’ve tried to stay as dovish as possible and not committed to additional policy changes, like rate hikes,”

said the Chief Macro strategist at Nomura in Tokyo, Naka Matsuzawa.

“I don’t think this was a disappointment, because it’s still a shift toward normalisation, in a way. But I think the currency market sees the balance between Japan and U.S. rates are leaning toward a stronger dollar and weaker yen,”

he further added.

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