Yen Climbs as Traders Weigh Fed Policy Path Against BOJ Stimulus

Bracing for Stimulus: What's Next for the BOJ?
  • Japanese currency appreciates against most of its major peers
  • BOJ decision coming one day after Fed's April 27 announcement

The yen strengthened for a second day against the dollar as speculation the Bank of Japan will add to currency-weakening stimulus was tempered by uncertainty on the Federal Reserve’s policy decision.

Prime Minister Shinzo Abe’s economic adviser said on Tuesday that this week’s meeting is the time for the BOJ to act if it wants to be preemptive. The Fed is also scheduled to announce its rate decision this week. While no Fed rate move is signaled by futures for this month, traders may focus on the post-meeting statement Wednesday to provide guidance on the future policy path.

Japan’s currency has strengthened about 0.9 percent since falling to a three-week low on Monday, following an April 22 Bloomberg report the BOJ may consider helping banks lend by offering a negative rate on some loans. It climbed against 14 of 16 of its major counterparts.

“I think market participants are becoming more cautious,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. “On the one hand because of the Bank of Japan meeting, and on the other because of the Fed meeting, there is still much uncertainty.”

The yen strengthened 0.3 percent to 110.89 versus the dollar as of 11:44 a.m. in London. It touched 111.91, the weakest level since April 1, on Monday. The Japanese currency appreciated 0.2 percent to 125.09 per euro, extending a 0.2 percent advance from the previous day.

BOJ Surprise

On Jan. 29, the BOJ surprised markets by unexpectedly adopting negative interest rates. While the yen weakened that day, the move proved to be short-lived. Since Feb. 1 the currency has appreciated about 9 percent against the dollar, as a slump in oil and darkening outlook for the global economy boosted demand for the yen’s relative safety.

“The upside in dollar-yen is relatively limited before these two meetings because people remember the experience” of the January BOJ meeting, Nguyen said. At the same time, traders are “not selling the dollar too much” as there was some risk of a hawkish statement from the Fed, she added.

Traders have pushed bets on a stronger Japanese currency to the most on record even with the risk of more stimulus from the BOJ. Bullish bets on the yen by hedge funds and other large speculators exceeded those benefiting from losses by 71,870 contracts in the week ended April 19, the most in data going back to December 1992, according to the Commodity Futures Trading Commission in Washington.

Mixed Views

Abe’s adviser, Etsuro Honda, who wants the BOJ to bolster its record monetary stimulus in the first half of this year, said it’s possible that the central bank will expand the purchase of government bonds and exchange-traded funds at this meeting, while holding the key rate at minus 0.1 percent. The decision on April 28 will come a day after the Fed’s announcement.

By contrast, former BOJ board member Nobuyuki Nakahara said the central bank has no need to rush to add stimulus now as it should gauge the impact of negative rates adopted in January. The yen at about 110 against the dollar is a comfortable level for Japan’s economy and that the government would need to intervene if it broke through 100, he said. 

Twenty-three of 41 analysts surveyed by Bloomberg expect Japan’s policy makers will expand stimulus this week. Nineteen analysts predict the BOJ will increase purchases of exchange-traded funds, eight expect a boost in bond buying and eight project the BOJ will lower its negative rate, the survey conducted April 15-21 shows.

The Government Pension Investment Fund will start currency hedging to protect its foreign assets against an appreciating yen, the Nikkei newspaper reported. The move could support the currency in the short term, said Bank of America Merrill Lynch strategist Shusuke Yamada.

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