Market alert: Japanese yen roars, Nikkei 225 sinks on BoJ Policy adjustment

The Japanese yen launched higher after the Bank of Japan tilted monetary policy at its meeting today.

USD/JPY (大口） has raced to a four-month low, and the Nikkei 225 equity index moved over 3% lower immediately.

While the bank left its policy balance rate at -0.10%, it adjusted its yield curve control (YCC) by targeting a band of +/- 0.50% around zero for Japanese Government Bonds (JGBs) out to 10 years.

The YCC target was previously +/- 0.25% around zero. The BoJ now holds more than 50% of all outstanding JGBs. USD/JPY collapsed from 137.50 to below 134.00 in seconds.

The sense in the market is that this could the beginning of several adjustments from the central banks. The consequences of an increase in JGBs yields may have significant ramifications globally.

The ramifications of the BoJ’s action could feed through many re-assessments across asset classes. The Japanese yen is often used as a funding currency. The Japanese are the largest holders of US Treasuries.

USD/JPY had already had a whippy start to the week after a report last Saturday from Kyodo News about the possibility of flexibility in the 2% inflation target. In an accord between the government and the central bank, price stability is at the core of the agreement.

The article over the weekend cited unnamed government sources posturing that the accord could be reviewed when a new bank governor is appointed in April 2023. That report might have been the signal for today’s move by the BoJ.

Japanese national CPI is due for release this Thursday. A Bloomberg survey of economists is anticipating headline CPI to be 3.9% year-on-year to the end of November, above the 3.7% previously.

USD/JPY technical analysis

USD/JPY tried to break above the upper band of a descending trend last week but was unable to do so. Today’s attempt was also unsuccessful and the BoJ’s announcement aided maintenance of the trend channel.

The descending trend line could continue to offer resistance along with two breakpoints and the recent high in the 137.67 – 138.17 zone.

On the downside, there is a cluster of previous lows and breakpoints that may provide support at 131.74, 131.50, 131.35, 131.25 and 130.40. The 260-day SMA is in amongst those levels at 130.91.

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