Image Source: Pixabay
 

Traders were treated to some late New Year fireworks overnight as the Japanese Yen collapsed across the board in reaction to the latest BoJ meeting. Ahead of the January monetary policy meeting, traders had been increasingly expectant that the BoJ would signal a shift in policy. With the bank having recently lifted the upper limit on its yield curve control target band, many took this as a precursor to a more concrete move to be announced at the meeting. Consequently, JGB yields were seen pushed above that upper limit for three consecutive days into the meeting.
 

Implied Volatility Hit Record Highs

It’s fair to say that expectations were split, however. Implied volatility in the options market ahead of the event hit its highest level in JPY since November 2008 (GFC).  In terms of trading ranges, options traders were broadly favoring a 2% move in either direction. Ultimately, JPY bulls were left empty-handed as the BoJ stuck to its ultra-loose easing policy.
 

Bond Purchases to Continue

While refraining from any hawkish policy shifts, the BoJ surprised by announcing that it will press ahead with large-scale bond purchases and will now be more flexible around duration e.g, running the operation for longer. Additionally, the BoJ was seen unveiling a new tool as it adjusted rules around its funds-supply market operation meaning it can now be used to help suppress yields, bolstering its yield-curve control operations.

Traders had been anticipating that BoJ governor Kuroda might look to lay the groundwork for a shift away from the bank’s ultra-loose policy ahead of his departure in April. However, on the back of this announcement, this now looks highly unlikely. With inflation now running at a 40-year high, however, the case for tightening is growing and critics warn that continued easing will only make the situation worse in Japan.
 

Market Reaction

JPY was seen lower across the board on Wednesday. Losing almost 3% against USD, GBP, and EUR. Meanwhile, Japanese stocks roared back into action with the Nikkei surging higher by almost 3% also. The key now will be to see whether the current reaction reverses or whether JPY settles into trading lower again. If USD data today see risk assets trading higher into the end of the week, this may well keep JPY pressured lower for now on weaker safe-haven demand.
 

Technical Views

USDJPY

(Click on image to enlarge)

More By This Author: