Yen tumbles after the Bank of Japan keeps policy unchanged

The last central bank to deliver its monetary policy statement this week was the Bank of Japan. Much has been said about central banks’ actions this week – a week that may go down as one of the wildest in the currency markets in a long time.

It started with the market learning that the Fed might hike by 75bp, and it continued with an emergency meeting from the European Central Bank as well as a rate hike from the Bank of England and the Swiss National Bank.

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Naturally, expectations grew that the Bank of Japan would do the same. That is, at least delivering a hawkish statement or signaling a hawkish pivoting.

As such, the Japanese yen strengthened in anticipation. Yesterday, it dropped almost three big figures or three hundred pips on what appeared to be imminent hawkish rhetoric from the Bank of Japan.

But the Bank of Japan did no such thing. In fact, it did just the opposite.

Not only that it kept the policy unchanged, but there was a dissenter that actually wanted the central bank to ease more than it currently does. Just like that, the yen reversed course and gave back all of yesterday’s gains and some more.

What are the implications for the yen moving forward?

The Bank of Japan is running a yield curve control program. Under the program, it tries to cap yields to keep financing conditions favorable in Japan.

As such, it buys government bonds to keep pressure on the yields.

But rising global yields push higher Japanese yields in a correlated move. Therefore, the more other central banks tighten, the more the Bank of Japan must ease to cap the yields.

As seen this week and in the week before, other central banks do tighten. Last week, the Reserve Bank of Australia delivered a bigger rate hike than the market expected. So did the Fed this week and the Swiss National Bank too.

All these actions push higher global yields, forcing the Bank of Japan to do more easing at a time when its peers are doing the exact opposite. Hence, it is difficult to envision an environment where the yen would appreciate in the near future as the Bank of Japan is in no hurry to tighten.

To sum up, the yen may consolidate at best in the short and medium term, but the likelihood is that it will keep depreciating against its peers.