Bank of Japan leaves interest rate, YCC policy unchanged


Following the highly-anticipated September policy review meeting, the Bank of Japan (BoJ) board members decided to leave their current monetary policy settings unadjusted, maintaining rates and 10yr JGB yield target at -10bps and 0.00% respectively.

Summary of the statement

BoJ makes decision on YCC unanimously.

BoJ makes no change to forward guidance.

BoJ maintains band around its 10-year JGB yield target at up and down 0.5% each.

BoJ maintains offer to buy 10-year JGBs at 1.0% daily through fixed-rate market operations.

Japan's economy recovering moderately.

Japan's economy likely to continue moderate recovery.

Inflation expectations showing renewed signs of accelerating.

Must watch financial and forex market moves and impact on Japan's economic activity, prices.

USD/JPY reaction

USD/JPY’s recovery gathered steam on the BoJ’s policy announcements. The pair is currently trading at 148.06, up 0.34% on the day, having jumped to 148.18 in a knee-jerk reaction to the BoJ decision.

USD/JPY: 15-minutes chart

Japanese Yen price today

The table below shows the percentage change of Japanese Yen (JPY) against listed major currencies today. Japanese Yen was the weakest against the Australian Dollar.

USD   0.13% 0.13% -0.07% -0.13% 0.28% 0.03% -0.03%
EUR -0.11%   0.00% -0.20% -0.25% 0.16% -0.07% -0.13%
GBP -0.12% 0.00%   -0.19% -0.26% 0.16% -0.08% -0.11%
CAD 0.07% 0.18% 0.19%   -0.04% 0.34% 0.11% 0.05%
AUD 0.14% 0.27% 0.27% 0.08%   0.43% 0.18% 0.13%
JPY -0.28% -0.17% -0.17% -0.36% -0.43%   -0.25% -0.29%
NZD -0.04% 0.08% 0.08% -0.11% -0.18% 0.24%   -0.04%
CHF 0.01% 0.14% 0.15% -0.05% -0.12% 0.30% 0.05%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

This section below was published at 23:00 GMT as a preview of the Bank of Japan (BoJ) policy announcements.

  • Japan's central bank is expected to maintain rates on hold one more time.
  • The Bank of Japan could hint at the end of the ultra-loose monetary policy.
  •  BoJ’s Governor Kazuo Ueda said the focus is on a “quiet exit.” 

The Bank of Japan (BoJ) is set to announce its monetary policy decision early on Friday. The Japanese Yen (JPY) could see a wide reaction, not because of the decision itself, but because of any potential hint to the end of the ultra-loose monetary policy that has been in place since early 2016. After cutting rates to -0.1% in January 2016, the central bank announced the Yield Curve Control (YCC) in September, initially aimed to maintain the 10-year government bond yield at around 0%.  

Bank of Japan Interest Rate Decision: What to know in markets on Friday, September 22

USD/JPY trades near a fresh 2023 high as the US Dollar got a boost from the latest Federal Reserve (Fed) hawkish pause. As widely anticipated, the central bank left rates unchanged in the September meeting but left the door open for another rate hike and hinted that borrowing costs could remain higher for longer. Fed projections imply one more 25 basis points (bps) rate hike this year and 50 bps of rate cuts in 2024, half the cuts previously anticipated for next year. 

The US Dollar is supported by generalized optimism ahead of the BoJ announcement despite the 2-year Treasury note yield peaking at a multi-year high of 5.202% in the Fed’s aftermath, its highest since 2006. It later eased to currently stand at 5.14%. The 10-year Treasury note offers 4.94%, ending the day unchanged. 

Global inflation has been generally hotter-than-anticipated in August, although the United Kingdom Consumer Price Index (CPI) rose 0.3% MoM against expectations of a 0.7% advance, while the annual reading came in at 6.7%, easing from the previous 6.8% and below the 7.1% anticipated.

The Bank of England (BoE) somehow surprised market players on Thursday as the central bank decided to leave the benchmark rate unchanged at 5.25% after fourteen hikes in a row. Financial markets somehow anticipated the decision amid cooling inflation data. Bets on additional rate hikes decreased, with one more 25 bps hike in the docket, yet the odds for a rate hike in November, however, slid from 81% before the announcement to 64% afterwards. 

Wall Street closed in the red as the dismal mood triggered by the Fed and exacerbated by the BoE continued throughout Thursday.   

When will the BoJ announce its interest rate decision, and how could it affect USD/JPY?

The Bank of Japan is widely anticipated to maintain rates unchanged at -0.1% once again in their September meeting.  No changes to the YCC are expected either, as the BoJ is well-known for being a slow machine.

As inflation in Japan has been exceeding the BoJ’s 2% target for over a year, policymakers have been under increased pressure to change course and tighten monetary policy.

On a negative note, wage growth remains subdued, and the central bank has remarked that higher wages are a prerequisite for moving away from monetary stimulus. Average cash earnings in Japan rose by 1.3% YoY in July, slowing from 2.3% in  June, although up for the nineteenth consecutive month.

As inflation rose, the central bank introduced changes to the yield curve control, allowing the 10-year yield on the Japanese Government Bond (JGB) to move in a wider band. Bottom line, the central bank has decided to intervene only when the 10-year JGB yield moves past 1.0%.

What puzzles investors and may introduce noise to the announcement is Governor Kazuo Ueda's latest comments.  In an interview with the Yomiuri Shimbun, Ueda said the monetary policy tweak in July was “a mechanism to change the balance between the effects and side effects” of monetary easing measures. But he also added that the focus will shift to a “quiet exit” from the ultra-loose policy to avoid any significant impact.  

However, financial markets head into the event with little hope of a relevant change in the forward guidance.  “It seems that the Japanese central bankers want a stronger Yen, but without this being based on the expectation of a less expansionary monetary policy,” economists at Commerzbank said in a research note.

Ueda’s words raised some alarms. Financial markets began speculating on a potential shift, although not for this year. The Nikkei reported, “A January decision to end negative interest rates appears to be a more realistic scenario, with practical factors delaying implementation to February. The BoJ is set to update its economic and price outlook for fiscal 2023 to fiscal 2025 at that time, giving it material to help explain the basis for the policy change.”

If the Bank of Japan introduces a hawkish shift, USD/JPY could plunge. The fall could be substantial considering the pair trades near this year’s high at 148.45, having appreciated sharply after bottoming at 127.21 in January.

Valeria Bednarik, Chief Analyst at FXStreet, said: “There are no technical signs suggesting the USD/JPY rally is over. On the contrary, the pair could keep running towards the 2022 high at 151.93 in the upcoming weeks, particularly if the market sentiment remains depressed, boosting demand for the American currency.  

From a technical point of view, the pair is bullish in its daily chart, with the 20-day Simple Moving Average (SMA) leading the way north, as per advancing above also bullish longer moving averages. The 20-day SMA is currently located at around 146.90, a potential bearish target should the BoJ surprise with a hawkish message. Below such area, the slump could continue towards 146.05.”

Bednarik added: “Keep in mind the initial reaction may not lead to a long-lasting trend, particularly if it results against the current bullish trend. Also, government bond yields reaction could provide clues on what to expect after the dust settles.”

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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