BOJ doubles down on bond-buying, yen hits 20-year low against the US dollar

The Bank of Japan (BOJ)’s decision this week was highly anticipated by currency traders. As the last major central bank that keeps easing the monetary policy, some hoped that the BOJ would pivot from its bond-buying program and yield curve control measures.

But it did not.

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It announced that it will buy 10-year JGBs every day at 0.25% to bring down yields. As a result, the yen fell to a 20-year low against the US dollar.

Moreover, overnight USD/JPY’s volatility was the highest since March 2020. The pair rose close to 2% in the hours after the BOJ’s announcement.

BOJ moves against the global tide

The BOJ’s decision is unique in every aspect. At a time when inflation hits advanced economies, forcing central banks to tighten the monetary policy, the BOJ does the opposite.

Because of its goal to keep yields down to stimulate economic activity, it must buy government bonds to control the yields. Other central banks, such as the Fed in the United States or the Bank of England, are set to start quantitative tightening or sell their bonds held on the balance sheet.

Because of the sharp divergence, traders sold the local currency, the Japanese yen, and bought other currencies. This has been the main theme since the start of March, and there is no change in sight.

What comes next for the Japanese yen?

It is hard to try to pick a bottom when the BOJ puts pressure on the currency. The USD/JPY rose from below 116 in March, and in less than two months, it moved above 130.

This is one of the most aggressive market moves in the currency pair’s history, taking many by surprise.

And it might still have some distance to travel, as the Federal Reserve is set to hike the rates next Wednesday. In other words, the gap between the two central banks’ policies will widen further, suggesting more weakness for the yen may lie ahead.