JPY surges as BOJ adjusts the yield curve control policy

Japanese yen (JPY) traders had a busy day as the Bank of Japan (BOJ) decided to tweak its monetary policy before Christmas. In a stunning maneuver, the central bank announced today that it would allow the 10-year yields to reach 0.5% instead of the previous 0.25%.

The change triggered a massive move in the currency market, where the JPY strengthened across the board. For example, on the announcement, the USD/JPY dropped more than five big figures (i.e., five hundred pips), from above 137 to below 132.

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Poor liquidity accentuates market moves

The BOJ is the only major central bank that did not hike the interest rate in 2022. Instead, it opted to conduct a yield curve control policy by capping the yields at 0.25%.

At the same time, it bought government bonds.

But yields kept pressing the upper edge of the corridor. By expanding the range of the 10-year JGB yield to between around +/- 0.5%, the BOJ is effectively tightening the policy.

However, at the same time, it announced that it would increase the amount of JGB purchases from 7.3 trillion yen per month to about 9 trillion yen per month. Therefore, one may say that today’s statement is tricky because the easy bias remains in the forward guidance paragraph.

Moreover, by choosing to tweak the yield curve control policy in the week ahead of Christmas, the BOJ surely expected a massive move in the currency market. Liquidity is poor this time of the year; perhaps, this is the BOJ’s way to respond to the JPY depreciation in 2022.