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Last week the Bank of Japan (BOJ) announced that it was keeping its key Policy Rate unchanged at minus 0.1%. In addition it introduced a target yield for the 10-year Japanese government bond (JGB) of zero, effectively taking control of the first 10 years of the bond market and yield curve. The idea is that as the BOJ has a short-term interest rate of -0.1% then it can achieve a positive yield curve by anchoring the 10-year at zero. Now the BOJ can steepen the yield curve and so boost the profitability of the banking sector by taking its Policy Rate further into negative territory. The BoJ has branded the programme "Quantitative and qualitative monetary easing with yield curve control."

The BOJ also said that it was now aiming to drive inflation above 2% and dropped its previous target of increasing its monetary base at an annual pace of 80 trillion yen (around $800 billion). Some analysts saw this as a sign that the BOJ’s programme of Quantitative and Qualitative Easing (QQE) had reached its limit. However, in his first speech since last week’s meeting, Mr Kuroda said yesterday that the pace at which the BOJ would buy bonds would depend on what was needed for the central bank to hit its yield curve target. Consequently, it appears that the BOJ wouldn’t be tapering after all.

If Governor Kuroda was hoping his comments would weaken the yen then he won’t be a happy bunny. The USDJPY continues to come under selling pressure and earlier today hit its lowest level in over four weeks, coming within a few ticks of breaking below 100.00.

Of course the other side of this currency pair is the US dollar. Just after the BOJ made its announcement, the US Federal Reserve held its base rate in the 0.25-0.50 percent range. While it signalled that it was prepared to tighten monetary policy before the year-end, recent US economic data has weakened over the last few months which reduce the likelihood of a rate hike in 2016.

All this is keeping the downside pressure on the USDJPY. This is a problem for Japan as it desperately wants to weaken the yen to keep its exporters competitive while boosting inflation. The question now is whether there is decent support for the USDJPY around the 100.00 level. If not, then will the BOJ intervene unilaterally to weaken the currency, and if so at what level?

PM Bulletin

David: If Governor Kuroda was hoping his comments would weaken the yen then he won’t be a happy bunny.

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Posted by David Morrison

Category: PM Bulletin


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