The challenge after the BoJ intervenes in the JPY

When the BoJ met in September speculation had been increasing regarding BoJ intervention. The weakness in the JPY had been impacting Japan’s import market pushing up consumer prices and higher energy prices earlier in the year had been making it worse. So, when the BOJ met it was perhaps surprising that it did not even particularly try to weaken the JPY. However, it did that the following morning.

The decision

The BoJ kept interest rates unchanged and it maintained the yield curve control. It repeated the need to keep the powerful easing policy in place. The pandemic relief program was extended between 3-6 months depending on how the loans were made. However, there was no indication that FX intervention was imminent.

The intervention

The rate statement was quickly eclipsed by the FX moves in the JPY. Those moves were affirmed by Japan’s Vice Minister for Financial affairs saying the Gov’t took decisive action in FX markets. You can see the impact of the BoJ’s intervention below in the USDJPY.

The problem

The difficulty here for the BoJ is that fighting market dynamics will be hard/impossible. The banks in recent history that have tried to intervene in their currency successfully against market forces have failed. Think of the SNB as a prime example when the EURCHF peg collapsed in 2015. So, if US10-year yields keep moving higher then the USDJPY pair can keep moving higher too. So, expect the market to test the BoJ’s resolve. On Friday the US Core CPI print will be released. If the print comes in below market expectations then the BoJ can breathe a sigh of relief as that should take the USDJPY pair lower in line with US 10-year yields. However, should the print come in higher then expect yields to rise and the USDJPY too. That will throw the ball back into the BoJ’s court and traders should watch for any further signs of intervention.

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