JPY surges as BOJ adjusts the yield curve control policy

on Dec 20, 2022
  • The BOJ tweaks its yield curve control policy
  • The announcement triggered massive JPY strength, with USD/JPY dropping 500 pips
  • At the same time, the BOJ increases the amount of JGBs monthly purchases

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Japanese yen (JPY) traders had a busy day as the Bank of Japan (BOJ) decided to tweak its monetary policy before Christmas. In a stunning maneuver, the central bank announced today that it would allow the 10-year yields to reach 0.5% instead of the previous 0.25%.

The change triggered a massive move in the currency market, where the JPY strengthened across the board. For example, on the announcement, the USD/JPY dropped more than five big figures (i.e., five hundred pips), from above 137 to below 132.

Poor liquidity accentuates market moves

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The BOJ is the only major central bank that did not hike the interest rate in 2022. Instead, it opted to conduct a yield curve control policy by capping the yields at 0.25%.

At the same time, it bought government bonds.

But yields kept pressing the upper edge of the corridor. By expanding the range of the 10-year JGB yield to between around +/- 0.5%, the BOJ is effectively tightening the policy.

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However, at the same time, it announced that it would increase the amount of JGB purchases from 7.3 trillion yen per month to about 9 trillion yen per month. Therefore, one may say that today’s statement is tricky because the easy bias remains in the forward guidance paragraph.

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Moreover, by choosing to tweak the yield curve control policy in the week ahead of Christmas, the BOJ surely expected a massive move in the currency market. Liquidity is poor this time of the year; perhaps, this is the BOJ’s way to respond to the JPY depreciation in 2022.


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