What Does Another Dovish Pause from the BoJ Mean for the Yen?

The interest rate decision has effectively put an end to recent market speculation regarding a possible pivot in policy that would have put an end to the negative rates that the Bank of Japan has maintained since 2016.

This particular interest rate decision has been monitored even more closely than usual by international investors following a recent interview in the Yomiuri Shimbun newspaper, in which BOJ Governor Kazuo Ueda made comments suggesting that the country’s negative rates could be coming to an end.

Japanese Inflation Remains Elevated

Earlier in the day, Japanese inflation data came in slightly higher than consensus expectations. Year-over-year core CPI rose 3.1% versus analyst expectations of a 3% print. Japanese inflation has remained above the BoJ’s 2% target now for 17 consecutive months.

The BOJ has been stubborn in bucking the trend of its global peers, often citing the unique characteristics of the Japanese economy in which inflation has mostly been below its 2% target since the late 1990’s.

At an ECB forum on central bank policy during the summer, Governor Ueda even joked about Japan finally having some inflation to contend with, thus drawing a line between his country and those of the other central bankers present at the conference.

The BoJ also maintained the parameters of its yield curve control program and vowed to increase stimulus without hesitation if needed. Since 2016, the BOJ has guided its 10-year government bond yield to a level around 0% while allowing it to fluctuate within a 0.5% band of its 0% target. In July, the BoJ expanded this band by offering to purchase 10-year Japanese Government Bonds at 1%, which effectively expanded the band’s range by a further 50 basis points.

Market Reaction

Japanese stocks reversed early losses as fears of a hawkish surprise abated. Earlier in the day, the Nikkei 225 dropped to four-week lows following US equities, which have experienced declines as Wall Street digests the September FOMC meeting in which the Federal Reserve didn’t hike, but upped its hawkish rhetoric and removed the possibility of a soft landing as the Fed’s base case.

The Nikkei currently appears to have found support at its 100-day moving average at 32220.80 and is currently moving higher, attempting to reclaim both its 50-day and 20-day moving averages. On the weekly timeframe, the decline caused the index to briefly trade below its 20-week moving average, where it previously found support during the August selloff.

The Japanese Yen also fell on the day, coming down to 147.53 against the US dollar, and 157.22 against the euro as traders attempted to price-in the possibility of a hawkish surprise from Governor Ueda. This is as pressure mounts for the BoJ to not let the yen weaken any further due to the effect this is having on Japanese consumers.

The weekly timeframe tells an unambiguous story of chronic yen weakness, as interest rates continue to remain elevated, and the BoJ remains one of the few global outliers.

Against the euro, the yen is currently trading at its lowest levels since the 2008 financial crisis. Against the US dollar the price action surrounding the BoJ decision has taken it up to new weekly lows above the 148 level, with only the October 2022 level remaining between JPY and lows last seen in August of 1990.

On the weekly timeframe of the EURJPY pair we see an RSI divergence developing as well as a bearish cross of the MACD signal line. On USDJPY there has been no such signal as of yet, however recent RSI levels are significantly below their October 2022 levels, despite the price having reached that 148.7 high.

Key Takeaways

The all-important 150 level for the yen against the dollar remains firmly in play, with September’s BoJ meeting seeming to have done little to deter traders from attempting to test it. This despite the BoJ having repeatedly demonstrated its willingness to intervene in markets.

The current lack of clarity from the Bank of Japan, and its importance as the last major central bank to maintain a dovish stance means that the BoJ is now one of the most interesting, and indeed difficult, central banks to follow at the moment.

The long yen trade, which has burned so many speculators in the past couple of years, remains one of the holy grails for currency speculators moving forward. It demands attention due to its potential for outsized moves when something finally changes in the BoJ’s outlook.

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