USD/JPY steadies at four-month low as BOJ-inflicted pessimism pokes firmer yields, Japan’s economic outlook

• USD/JPY licks its wounds after falling the most in a day in 24 years.
• US 10-year Treasury yields stay firmer around one-month high, Asia-Pacific equities trade mixed.
• Risk appetite remains sluggish amid mixed signals; US Dollar steadies ahead of CB Consumer Confidence.

USD/JPY remains mildly offered near the multi-day low marked the previous day, retreating to 131.60 during Wednesday’s Asian session, as traders take a break after the heavily volatile day.

On Tuesday, USD/JPY dropped the most since October 1998 as the Bank of Japan (BOJ) shocked markets with a surprise move suggesting lesser funds flowing outside Japanese bond markets due to a policy tweak. The Japanese central bank kept the monetary policy unchanged but widened the band of Yield Curve Control (YCC) to -/+ 0.5% from -/+0.25% prior.

Recently, the Japanese Cabinet released a monthly economic update and anticipated the first improvement in the business sentiment since December 2021. “Japan will pay close attention to the COVID-19 situation in China, in addition to risks from a global economic slowdown, price hikes and supply constraints, according to its monthly report for December,” said Reuters said additionally.

It’s worth noting that the news suggesting Japan government set assumed interest rates at a record low of 1.1% for the compilation of the Fiscal Year (FY) 2023/24 budget seemed to have exerted downside pressure on the USD/JPY prices.

Elsewhere, the US Dollar Index (DXY) dropped the most in a week the previous day, steady around 104.00 by the press time, as the greenback traders feared less Japanese bond-buying of the US Treasury bonds due to the BOJ action. Japan is the biggest holder of the US Treasury bonds, and the latest move allows Tokyo to put more funds into the nation than letting it flow outside. That said, the 10-year counterpart rose more than the two-year ones and hence reduced the yield curve inversion that suggests the odds of the recession.

Amid these plays, the US 10-year Treasury yields grind near a three-week high of 3.69% while the two-year bond coupons stay firmer, around 4.26% by the press time. Further, Wall Street closed in green, allowing stocks in the Asia-Pacific bloc to print mild gains of late. Additionally, yields on the two-year Japanese Government Bonds (JGBs) rose beyond 0.0% for the first time since 2015.

Looking forward, updates from Japan and the bond market moves will be in focus for clear directions, while the US Conference Board (CB) Consumer Confidence figures for December, expected at 101.00 versus 100.00 prior, could also direct USD/JPY moves.

Technical analysis

Unless providing a clear daily break of the 78.6% Fibonacci retracement level of May-October upside, around 131.70 by the press time, USD/JPY bears can keep attacking August month’s low of 130.40 for further downside.