The Bank of Japan (BoJ) unexpectedly relaxed the yield curve control (YCC) policy, which shocked the global financial market and increased the pressure on international investors in Japan to hedge their foreign currency assets. Analysts at Societe Generale predicted that the yen will appreciate further , which could climb to 125 yen to the dollar next month.
The Bank of Japan doubled its target ceiling for 10-year government bond yields on Tuesday (20th), allowing the yield to rise as high as 0.5%, fueling market speculation that the Bank of Japan’s policy may finally be turning. The yen once soared 5% against the US dollar to 130.58 on the day. Although the gains were restrained, it still rose 3.9% to 131.73, hitting a high in more than four months and the largest one-day increase since 1998.
The yen led gains among G10 currencies, Japanese and U.S. bond yields both rose, and U.S. stocks opened lower.
Kit Juckes, chief foreign exchange strategist at Societe Generale, said the yen could rise to 125 in January next year as Japanese money managers gradually digest the Bank of Japan’s more appropriate stance.
He said: “As we said before, the volatility of USD/JPY is mainly determined by changes in Japan’s net international investment position and foreign currency risk aversion ratio. Buy the yen during light periods.”
The long-term monetary easing policy has made the yen one of the most important financing currencies in the world, and it plays the basis of “carry trade” (carry trade, buying low-interest rate currencies and converting them into high-interest rate currencies to earn interest difference). But as the yen’s status as the world’s cheapest funding currency has been shaken, there could be a massive restructuring of global funding.
Not only that, but with Japanese government bonds now offering higher yields, funds may move out of foreign countries and into Japan as the U.S.-Japan interest rate differential narrows.
Ben Emons, director of fixed income at Newedge Wealth, said: “The Bank of Japan shocked the market, but the carry trade is not completely over. Japanese interest rates are still negative, and the yen has not turned up this year. The most important impact will be the yen. Japanese investors will reduce their demand for U.S. debt due to the shift in the relationship between the U.S. 10-year bond yield and the U.S. 10-year Treasury yield.”