USD/JPY soars as Bank of Japan defends ultra-loose policy and not the yen, where to?

The Japanese yen was initially hammered as the Bank of Japan retained policy unchanged in June. Benchmark lending rates and a 10-year government bond yield target remained at -0.1% and 0% respectively. This was not a surprise. Rather, markets were looking to see if the central bank would start shifting its forward guidance amid a weakening currency and rising local inflation.

Heading into the Bank of Japan rate decision, overnight implied volatility in USD/JPY surged to the highest since March 2020. This reflected surging demand to hedge daily movements in the pair. An unexpected rate hike from the Swiss National Bank might have played a role here, perhaps raising the stakes for Mr. Kuroda to follow in its footsteps.

And volatility is what we got as you can see in the reaction below. USD/JPY initially popped before whipsawing in the minutes after.

Japanese yen, USD/JPY reaction to Bank of Japan in June

Bank of Japan remains committed to ultra-loose policy

It wasn’t just traders who were watching the yen, but the BoJ itself. The rapid depreciation in JPY was noted as an economic headwind by Governor Haruhiko Kuroda earlier this week. He said that it would be ‘negative for the economy’. For an island nation economy that purchases goods abroad, especially energy, a soft yen could result in the nation importing inflation and pushing up CPI.

In a rare occurrence, the central bank noted that it ‘needs to pay due attention to currencies and markets’. However, outside of verbal jabbing, an explicit mention of intervention was notably absent. Instead, the central bank seems committed to defending its ultra-loose policy. Mr. Kuroda said that the central bank ‘will add to easing without hesitation if needed’. This could leave the yen vulnerable to an ongoing divergence between the central bank and its major peers, who are turning increasingly hawkish.

With that in mind, the next Japanese inflation print is due next week on June 23rd at 23:30 GMT. A stronger print could result in some yen volatility. One-week implied volatility for USD/JPY sits around 20.90, the most since March 2020. If the last remaining dovish major central bank is expected to fold, that also does not bode well for market sentiment, something that the anti-risk currency will surely…appreciate.

USD/JPY technical analysis

USD/JPY recently rejected the 2002 high, establishing immediate resistance at 135.16 – 135.56. Prices also left behind and confirmed a Bearish Engulfing, opening the door to a reversal. However, the rising trendline from March continues to maintain the uptrend. It would only start to look more neutral if the pair dips below the trendline. Otherwise, extending gains would expose the 78.6% Fibonacci extension at 139.67 before the 100% level at 143.30 comes into play.

USD/JPY daily chart

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