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USD/JPY collapses after surprise BoJ policy shift

Massive volatility came in the Asian session as the BoJ surprised investors and sent the JPY sharply higher.

What a day for the Japanese Yen as the USD/JPY pair falls massively during the Asian session.

BoJ surprises, causes havoc in markets

After leaving policy rates untouched, the ‘easiest’ central bank in the world chose to drastically alter its so-called Yield Curve Control (YCC) and boost the amount of government bonds it will purchase each month (while the rest of the world is doing the opposite).

The increase in yield range is enormous, from -0.5% to +0.5% in yields). Consequently, this is a policy tightening that permits long rates to rise from 25 basis points (the previous YCC limit) to 50 basis points (the current YCC limit).

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The YCC modification is cited as a tool to promote a more efficient operation of the bond market. The BOJ claims the modification was made because:

“the functioning of bond markets has worsened, notably in terms of relative interest rate connections among bonds of varying maturities and arbitrage interactions between spot and futures markets. This might have a detrimental effect on financial circumstances if these market conditions persist.”

In addition, the BoJ upped its monthly bond purchases to ¥9 trillion from January to March. The proportion of Japanese government bonds held by the Bank of Japan has surpassed 50% in terms of market value, according to figures released on Monday.

In conclusion, the BoJ will permit the 10-year yield to climb to 0.50% from 0.25%, but to make the transition as smooth as possible, it will raise monthly bond purchases to ¥9 Trillion from ¥7.3 Trillion.

As a result, the USD/JPY pair has just had one of its biggest declines ever, falling nearly 4% (or 500 pips) to the lowest level since August, definitively ending the uptrend for now.

Ultra-lose policy continues

In addition, Kuroda reaffirmed during the press conference following the decision that they “would not hesitate to loosen monetary policy further if required.”

Sustainable, steady inflation target fulfillment should be decided not just by salary data but also by economic and price patterns, the underlying mechanism, and future projections.

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Lastly, the central bank left intact its forward guidance on interest rates, stating that it anticipates that short- and long-term policy rates would remain at “present or lower” levels.

The pair is now firmly below the key 200-day moving average (blue line, at around 135.70). As long as it trades below 135.70, the outlook now seems bearish, targeting previous highs and lows near 131.40, and, afterward, the psychological level of 130.

USDJPY daily chart

USDJPY daily chart, source: author´s analysis, tradingview.com

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