empty
17.01.2023 09:31 AM
USD/JPY is in a dangerous situation

This image is no longer relevant

USD/JPY traders are feeling nervous. The Bank of Japan will sum up the results of its 2-day monetary policy meeting on Wednesday. Now any surprise from the BOJ could have a significant effect.

The culminating event of the week in the currency market should be the Japanese central bank's monetary policy meeting, which kicked off on Tuesday.

With inflationary pressures intensifying in Japan and chaos reigning in the local bond market, many investors believe that the BOJ could announce a major policy shift this week, like it did last month.

Recall that the BOJ tweaked its Yield Curve Control policy (YCC) in December, causing the yen to rise sharply against the dollar. Since then the pair has fallen over 6% and its future prospects are not bright at all.

Investors clearly see that the BOJ is in a difficult predicament. Its decision to widen its tolerance range for 10-year bond yields was dictated by a desire to improve market functioning, as the bond market faced a liquidity problem. But the measure has made the situation even worse.

By changing the YCC, the BOJ stoked the flames of market speculation about its possible surrender. This in turn provoked a massive sell-off in 10-year Japanese Government Bonds (JGB), which pushed their yields up.

Since last week, the central bank has been trying its best to keep the index within the new limits by conducting daily emergency operations to buy JGBs. However the yield of 10-year JGBs is still growing above the set ceiling.

That's what leads investors to think that the BOJ will be forced to further increase the permissible range of long-term bond yield fluctuations from its 0% target at the January meeting.

If the BOJ makes such a decision again, it will serve as a great catalyst for the yen. In the short term, the USD/JPY risks falling below its 7-month low at 127.22.

This image is no longer relevant

An even greater threat to the pair is the development of a radical scenario, which implies a complete abandonment of the BOJ's YCC policy. If the central bank decides to burn all bridges, USD/JPY will go into a prolonged free-fall.

"The 10-year JGB yield could rise as high as 1% if the BOJ abandons yield curve control this week," according to estimates by Daiwa Securities strategist Eiichiro Tani. This negatively affects the movement of the pair.

According to analysts at Goldman Sachs, the next YCC correction will help the yen strengthen against the dollar by more than 3%, to the level of 125, and an abandonment of the YCC will open a fast way to even higher levels for the Japanese currency.

It's worth noting that US bank analysts don't even consider the latter scenario. Most of Goldman Sachs' analysts expect the BOJ to keep YCC in place with possible further tweaks to improve its sustainability.

Financial analyst Barbara Rockefeller is of the same opinion. She believes that we should not expect the BOJ to take impulsive actions in the form of abandoning the YCC or a sharp change in the monetary course.

"Allowing a giant move from 25 bp to 1% in under a month is too wild for any central bank, let alone the staid BoJ. So, abandonment is almost certainly out of the question, but that doesn't mean the market will not be expecting it and testing prices, forcing the bank to buy more bonds. We expect a whole lot of backroom arm twisting," Rockefeller said.

According to ING economists, the USD/JPY pair can fall sharply ahead of the results of the BOJ meeting. They suspect USD/JPY can trade down to 126.50 before Wednesday.

As for the dynamics of the dollar-yen asset after summing up the results of the BOJ meeting, everything depends on the market's reaction to the rhetoric of the Japanese officials. If it is considered hawkish, the quote will fall, as I mentioned before.

If the central bank stays true to its dovish principles, in the short-term, the pair may show a steady recovery from the recent lows. By the way, this scenario is followed by all economists recently surveyed by Bloomberg.

Experts expect the BOJ to refrain from any changes at its January meeting. But the probability they are wrong is quite high, because last month none of the 47 economists surveyed by Bloomberg was able to predict YCC changes.

Аlena Ivannitskaya,
Analytical expert of InstaForex
© 2007-2025
Select timeframe
5
min
15
min
30
min
1
hour
4
hours
1
day
1
week
Earn on cryptocurrency rate changes with InstaForex
Download MetaTrader 4 and open your first trade
  • Grand Choice
    Contest by
    InstaForex
    InstaForex always strives to help you
    fulfill your biggest dreams.
    JOIN CONTEST

Recommended Stories

Trump. Season 2: Intrigue, rates and a cryptocurrency with his own name

The dollar continued to show resilience on Monday, while Asian stock markets expressed cautious optimism. Investors were tensely awaiting Donald Trump's first steps in his second term, and speculated that

Thomas Frank 07:40 2025-01-20 UTC+2

Markets under pressure: What do China GDP numbers and US unemployment mean?

Morgan Stanley rises after higher fourth-quarter profit UnitedHealth falls as no quarterly sales estimates are released Investors analyze retail sales, unemployment data Indices fall: Dow 0.16%, S&P 0.21%, Nasdaq 0.89%

Thomas Frank 09:31 2025-01-17 UTC+2

Earnings Season and Global Rates: Asia Rejoices, Dollar Loses

Asian Stocks Rise, Fueled by Tech Yen Rises to One-Month High on Rising Rate Hike Bets Dollar Weakens as Cool U.S. Inflation Rekindles Rate Cut Hopes U.S. Earnings Open with

Thomas Frank 10:39 2025-01-16 UTC+2

Why the Dow and S&P 500 are growing, while the Nasdaq is stalling: detail analytics

US producer prices rose moderately in December Boeing fell after a report of low aircraft deliveries in 2024 Eli Lilly fell after a weak forecast for sales of a weight-loss

Thomas Frank 07:45 2025-01-15 UTC+2

Why Tighter AI Chip Regulation Is Spooking the Market, While Insurance Companies Are Cheering Investors

Moderna Slips After Cutting 2025 Sales Forecast Chip Stocks Fall as U.S. Tightens Controls on AI Chip Flows Health Insurers Rise as U.S. Proposes 2026 Payout Rates Indices

Thomas Frank 10:57 2025-01-14 UTC+2

Walgreens on the Rise: Best Day Since 1980 as Other Giants Sink

US Jobs Growth Beats Expectations in December S&P 500 Futures Fall Ahead of US CPI, Earnings Walgreens Set for Best Day Since 1980 After Beating First-Quarter Profit Constellation Brands Slips

Thomas Frank 06:28 2025-01-13 UTC+2

Nikkei and U.S. Futures Sink Quietly: Where to Look for Resilience

U.S. Stock Futures Fall After the Close Nikkei Down 0.9%, Chinese Bond Yields Rise U.S. Payrolls Data Crucial for Bond Market Dollar Surges Near 2-Year Highs, Rising for 6th Week

Thomas Frank 10:18 2025-01-10 UTC+2

Fed signals price risk: Should we expect a new round of inflation?

US private sector job growth slows in December - ADP Fed meeting minutes show growing risk of price pressure Quantum computing stocks fall as Nvidia CEO sees long road ahead

Thomas Frank 07:20 2025-01-09 UTC+2

What lies in store for JPY in 2025?

The yen has once again emerged as one of the worst-performing currencies in the G10 by the end of the year. Since January, its exchange rate against the US dollar

Аlena Ivannitskaya 07:44 2024-12-30 UTC+2

Dow Ends 5-Day Gain, S&P 500 Down: Wall Street Friday Results

Stocks Fall in Broad Selloff; Dow Ends 5-Session Winning Run Dollar Set for 7% Year-Over Gain; Yen Faces Fourth Year of Losses S&P 500's 45 YTD Index Gains All Close

Thomas Frank 07:21 2024-12-28 UTC+2
Can't speak right now?
Ask your question in the chat.
Widget callback
 

Dear visitor,

Your IP address shows that you are currently located in the USA. If you are a resident of the United States, you are prohibited from using the services of InstaFintech Group including online trading, online transfers, deposit/withdrawal of funds, etc.

If you think you are seeing this message by mistake and your location is not the US, kindly proceed to the website. Otherwise, you must leave the website in order to comply with government restrictions.

Why does your IP address show your location as the USA?

  • - you are using a VPN provided by a hosting company based in the United States;
  • - your IP does not have proper WHOIS records;
  • - an error occurred in the WHOIS geolocation database.

Please confirm whether you are a US resident or not by clicking the relevant button below. If you choose the wrong option, being a US resident, you will not be able to open an account with InstaForex anyway.

We are sorry for any inconvenience caused by this message.