Japanese currency declines, bonds rise as BOJ maintains ultra-easy policy

On Wednesday, the Japanese currency fell and bonds had their largest gain in two decades as a result of the central bank of the country continuing its ultra-easy monetary policy, confounding expectations that it would begin to wind down its enormous stimulus package.

The 10-year government bond yields were over the policy ceiling of 0.5% for a fourth straight session due to speculation in the bond market that the BOJ would adjust the parameters for its yield curve control (YCC) at the meeting that ended on Wednesday.

However, the bank continued to offer extremely low-interest rates, such as its 0.5% ceiling on the yield on 10-year bonds.

The 10-year yield achieved an intraday high of 0.51% prior to the BOJ announcement, but then dropped as much as 15 basis points, the most since September 2003, to a low of 0.36%. The most recent price was 0.395%.

Meanwhile, defying the general decline, Japan’s Nikkei share index (.N225) soared 2.5%, the greatest gain since mid-November.

Additionally, the dollar increased by 2.5% versus the Japanese currency to reach 131.4 yen, marking the largest daily percentage increase since March 2020.

In other news, stocks fell, with MSCI’s broadest index of Asia-Pacific shares outside of Japan (.MIAPJ0000PUS) falling 0.2%, following overnight declines in the Dow Jones index (.DJI) and Goldman Sachs (GS.N) due to bad earnings.

The investment bank’s fourth-quarter profit decreased by a larger-than-expected 69%.

With the regional Euro Stoxx 50 futures up 0.3%, European markets are expected to open somewhat higher. Both Nasdaq futures and S&P 500 futures were up 0.1%.

97% of economists surveyed by TradingTwist believed the BOJ will maintain its ultra-easy policy at the meeting.

Sean Callow, a senior currency analyst at Westpac, said, “It was a challenging day for the bond vigilantes who were positioned to push the BOJ into a policy shift not justified by their economic forecasts.”

The BoJ will undoubtedly be busy in the next weeks with the JGB market, but as there were no fresh projections at the March meeting, traders of JGBs and JPY should take it easy and lower their hopes.

Any future increases in the value of the Japanese currency may need to wait until April, when a new BOJ governor is anticipated to take office, according to Mahjabeen Zaman, head of FX Research at ANZ.

With his decision to widen the band in December, Kuroda, in my opinion, laid the framework for the incoming governor to join in and carry on from there.

By the end of 2023 and 2024, respectively, Zaman predicts that the yen would increase to 124 and 116 per dollar.

The BOJ surprised the markets a month ago by tripling the range for the 10-year JGB rate, to 50 basis points on either side of 0%. Speculators were encouraged to test the BOJ’s commitment after the adjustment.

Given the challenges resulting from its divergence from monetary policy elsewhere, Mizuho Bank analysts stated in a report that the BOJ revising YCC or raising interest rates above zero was merely a matter of time and execution.

According to a BofA Securities survey of international investment managers released on Tuesday, predictions for further yen appreciation in January were at their highest level in 16 years.

The dollar index, which compares the safe-haven currency against six other currencies, increased 0.4% to 102.84. As markets bet that the Federal Reserve will be less aggressive in raising rates, it has recently been weakened by declining U.S. bond yields.

Overseas, longer-dated bonds also increased. The yield on benchmark 10-year Treasury notes decreased 5 basis points to 3.4848% in the Treasury market.

Oil prices increased in anticipation of a pickup in Chinese demand. While U.S. West Texas Intermediate (WTI) crude closed up 0.8% at $80.85, Brent crude futures increased by 0.8% to $86.56.

German Chancellor Olaf Scholz expressed his conviction that Europe’s largest economy would not experience a recession on Tuesday at the World Economic Forum in Davos.

Vice Premier Liu of China After three years of epidemic isolation, he also opened his country available to outside investment and announced the outbreak was over.

According to data released on Tuesday, China’s economic growth in 2022 plunged to 3.0%, the lowest level in 50 years.

To $1899.23 per ounce, spot gold declined by 0.6%.

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