Bank of America Global Research discusses the implications of the BoJ policy adjustments on USD/JPY.
"We believe the BoJ's results were in line with FX market expectations and highlighted the high hurdle for the BoJ to cut rates, which is positive for JPY against USD on the Fed-BoJ policy convergence. USD/JPY's resilience has been supported by rising demand for USD liquidity and portfolio rebalancing by Japan's public pension funds. On the latter, we expect pension rebalancing to be mostly done this month as the Government Pension Investment Fund (GPIF) is scheduled to announce its new model portfolio by April
"We think strengthening of the USD funds-supply operations may alleviate USD funding pressure. The BoJ extended the duration of the lending period up to three months from one week and at a cheaper rate of OIS+25bp instead of OIS+50bp. The BoJ conducted a three-month term operation on 17 March and took up a total of USD30.3bn, the record amount under the current program. It has helped JPY/USD basis tighten. Once demand for USD liquidity normalizes, we think it will be easier for USD/JPY to decline," BofA adds.