Danske Research discusses the scope for further JPY intervention and USD/JPY outlook.
"The Bank of Japan (BoJ) intervened in the FX market this morning on behalf of the Ministry of Finance (MoF). This came a few hours after the announcement that BoJ kept its QQE with yield curve control in place and thus remains the only major central bank sticking with negative rates, after SNB hiked today
The decision to stem the massive weakening of the yen triggered a USD/JPY decline by five figures to 140.8 levels and then bounced up and down during the following hours. Japan has the world's second largest foreign exchange reserve, so there is some weight behind an intervention like this. But the fact remains that the BoJ pursues a monetary policy that sends more yen into the market. It is hardly a sustainable situation for the BoJ to pursue its inflation target while simultaneously propping up the yen," Danske notes.
Today's decision has increased the likelihood that the BoJ will end up giving in to the global pressure for higher yields and abandon the YCC, or allow for a steeper yield curve. It is not least this higher probability that is being priced in the market and which has driven the yen stronger. If the BoJ does not adjust its monetary policy, then it may be difficult to prevent the yen from weakening again, and then we could quickly be back in a situation with a record weak yen again," Danske adds.