The Bank of Japan (BoJ) kept its dovish stance and left monetary policy unchanged. As a result, the USD/JPY pushed higher with the Japanese yen weakening across the board. Economists expect the yen to be driven primarily by external factors, specifically US rates, following the BoJ’s decision. After ignoring market pressure, the Japanese central bank indicated that the path to normalisation would be a gradual one.
Bank of Japan policy decision
The BoJ kept the short-term rate target at -0.1% and the 10-year JGB yield target at 0%. The central bank’s forward guidance remained the same.
The BoJ’s decision to maintain its policy and united vote to keep the Yield Curve Control (YCC) policy unchanged weighed heavily on the yen. Additionally, the prevalent risk-on mood pushed the safe-haven JPY lower.
Speaking at his post-meeting press conference, BoJ Governor Kazuo Ueda repeated that the central bank could take further easing measures if necessary. His comments, combined with a modest rise in the greenback after a number of Federal Reserve (Fed) officials pushed back against market expectations for early rate cuts in 2024, have supported the USD/JPY.
Economists at Commerzbank have commented on the Japanese currency’s outlook after the BoJ’s decision, saying that the bank has given no indication of moving in the direction of “less ultra-expansionary.” They have argued that the USD/JPY pair will be driven by the dollar. This means that if the USD/JPY pair weakens, then it won’t be because of the yen’s strength, but rather because of the dollar’s weakness. For example, since the Fed rate cut expectations are rising, this will weigh on the dollar and influence the pair. For this reason, the BoJ should hope for further dollar weakness, if they want to see a stronger yen. Furthermore, the analysts said that all efforts to intervene and boost the yen will ultimately fail, if the dollar appreciates again at some point. They explained that the BoJ’s hesitation has now given them little room to make a move in the future and has “put the fate of the Yen in the hands of the Fed or the Dollar.”
ING economists also believe that the yen will be driven mainly by US rates after taking a hit today. They added that the bank’s decision to keep its dovish guidance the same has forced market participants to abandon their bets for a rate hike in January. However, they noted that they have spotted a few changes in the Bank’s assessment of the economic outlook that could support the market’s expectations for a hike in April. They highlighted that they do anticipate the yield curve control to be abandoned in January and an April hike to be delivered.
Economists remain bearish on the USD/JPY pair and expect the weak yen to benefit from negative rates. With the Fed potentially cutting rates by 150 bps, economists expect the pair to drop lower but gradually in the near term.