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Singapore - The yen fell the most against the dollar this month after the Bank of Japan shifted the focus of its monetary policy from expanding money supply to controlling yield curves.
The Japanese currency fell 0.8% to ¥102.54/$ as of 07:59, after Governor Haruhiko Kuroda and his board said the monetary base target, which previously had been set at annual increases of ¥80trn, may now fluctuate in the short term. The yen whipsawed after the announcement, reaching ¥102.79, the weakest since September 14. It declined against all of its 31 major peers, while local stocks surged.
“This has probably produced enough surprise for a market heavily short dollar-yen to take some profits,” said Sean Callow, a senior currency strategist at Westpac Banking in Sydney.
“It was a long wait for the BOJ decision and it’s not clear that it was worth it. But the change of approach does at least confirm that the policy review was indeed comprehensive.”
The BOJ kept the benchmark rate for a share of bank reserves at minus 0.1%, saying it can extend the negative rate if needed. It scrapped a target for the average maturity of its government bond holdings. Board members also pledged to expand the monetary base until inflation is stable above the 2% target - committing to an overshoot of consumer-price gains.
Just over half of economists surveyed by Bloomberg forecast an expansion of monetary stimulus at the end of the two-day meeting.
‘Dry gunpowder’
“All options were left on the table - from rate cuts to asset purchases,” said Vishnu Varathan, an economist with Mizuho Bank in Singapore. “This is a concerted communication that dry gunpowder is left in the existing policy keg.”
Japan’s currency has outperformed its developed-market peers this year, surging 18% against the greenback through Tuesday, amid doubts that Kuroda had adequate tools left to revive the economy as his goal of raising inflation to 2% proved elusive. The central bank’s decision to cut rates to minus 0.1% in January set off a rout in banking stocks and a flight to the safety of the yen.
Bullish bets on the yen currency remained close to the record high reached in April in the week ended September 13 as hedge funds and other large speculators added to wagers that sought to profit from its strength since the start of the year, data from the Commodity Futures Trading Commission show.
Fed ahead
Investors are now awaiting the Federal Reserve’s interest-rate decision later Wednesday as a driver for the dollar’s outlook versus the yen. The Bloomberg Dollar Spot Index, a measure of the greenback against 10 major peers, rose for a second day, advancing 0.2%.
“The BOJ said it can still undertake further easing, and given its new framework will allow it to undertake more negative rate cuts while mitigating the downside impact on financial institutions’ profitability, the risk is for more easing action in the fourth quarter,” said Mansoor Mohi-uddin, a Singapore-based strategist at Royal Bank of Scotland.
“Coupled with the prospect of the Fed hiking before year end, dollar-yen should trade into a higher 105-110 range as we enter the last quarter of the year.”
