Yen Rally Highlights Investor Skepticism Over BOJ’s Latest Salvo

Updated on
  • Currency climbs to highest level in more than three weeks
  • Market attention shifts toward Fed interest-rate decision

BOJ Shifts Policy Framework: What Does It Mean?

The yen rose to a three-week high on growing sentiment that the Bank of Japan’s move to more flexible approach to expanding stimulus won’t reduce demand for the nation’s currency.

It reversed an initial slide, suggesting investors are skeptical that BOJ policy makers will achieve their long-term goal of boosting inflation. Japan’s currency extended gains versus the dollar after the Federal Reserve left its key interest-rate target unchanged and emphasized a gradual path toward tighter monetary policy.

"The market continues to see this fear on the part of the BOJ of cutting the base rate more into negative territory," said Steven Englander, global head of Group-of-10 currency strategy at Citigroup Inc., in an interview with Bloomberg Television. "As long as they see that, I think that they’re going to take" the yen higher, he said.

More policy easing normally tends to undermine a currency, and a weaker yen would help the BOJ achieve its goal of boosting inflation. But officials have found it tough to deliver, with the decision to adopt negative rates in January setting off a rout in banking stocks that soon spurred a flight to the safety of the yen.

The yen climbed 1.4 percent to 100.32 per dollar as of 5 p.m. in New York, after earlier sliding as much as 1.1 percent. It touched the strongest level since Aug. 26. The currency added 1 percent to 112.27 per euro.

BOJ Governor Haruhiko Kuroda and his board said the central bank would move away from a rigid target for expanding the money supply, while seeking to control bond yields across different maturities. The central bank left the benchmark rate for a share of bank reserves unchanged at minus 0.1 percent, saying it may extend the negative rate if needed.

The BOJ said its target for expanding the monetary base through asset purchases, previously set at 80 trillion yen ($789 billion) annually, may fluctuate in the short term to enable policy makers to control bond yields. It scrapped a target for the average maturity of its government bond holdings.

Policy makers pledged to expand the monetary base until inflation is stable above the authority’s 2 percent target -- committing to an overshoot of consumer-price gains. Options for further easing include both increasing asset purchases and lowering target yields, Kuroda said a news conference in Tokyo. Just more than half of economists surveyed by Bloomberg had predicted an expansion of monetary stimulus at the end of the two-day meeting.

“We suspect dollar-yen eventually settles lower, given how vague the timetable to reach 2 percent inflation is, and also the severe doubts over whether we will ever see the happy day,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney.

The yen has outperformed its developed-market peers this year, surging 20 percent against the dollar, amid doubts that Kuroda had adequate tools left to revive the economy.