Yen appreciates due to soaring Japanese government bonds

Japanese Yen (USD/JPY) Analysis

• As the market digests Ueda’s remarks, the yen accelerates bidding in the final stages.
• The day after the Bank of Japan meeting, the rise in Japanese government bonds stimulates the yen exchange rate.
• USD/JPY moves away from the 150 mark with near-term support at 146.50
• For expert insights on Japanese Yen considerations for Q1, download the forecast below.

As the market digests Ueda’s comments, the yen accelerates delayed buying.

The main takeaway from yesterday’s Bank of Japan (BOJ) meeting was that despite inflation showing signs of slowing, Ueda still has his sights set on an eventual exit from negative interest rates. . Mr. Ueda said that the chances of achieving the 2% target are “increasing,” and that unless the current suboptimal output gap (difference between potential output and current output) is addressed, negative interest rates will continue to rise. He even said that escape was possible.

The market expects the Bank of Japan’s meeting to be held in April, but is currently pricing in the full 10 basis points (bp) by the June meeting. What the Bank of Japan is primarily seeking is a continuation of what it calls a virtuous cycle between inflation and wages. The wage negotiation process is likely to come to a close in March, and the market naturally turned its attention to the April meeting for developments in interest rates.

Implicit basis points priced in by interest rate markets

Source: Refinitiv, Author richard snow

Rising Japanese government bond yields spur Japanese yen

Japanese government bond (10-year) yields continued to rise today after the Bank of Japan meeting. Yields are still far from their peak in early November, before inflationary pressures showed signs of slowing and dampened market expectations of impending rate changes. Higher yields make the yen more attractive and usually result in appreciation of the local currency.

Japanese government bond yield (10 years)

Source: TradingView, Author richard snow

The yen has appreciated broadly against many major foreign exchange currencies (pound, Australian dollar, euro, and US dollar), as seen below in an equal weighted index comprised of the currencies listed above.

Source: TradingView, Author richard snow

USD/JPY emerges as immediate support at 146.50, moving away from the 150 mark

USD/JPY found resistance just below the 150 mark, but failed to reach the psychological level after the Bank of Japan Governor indicated that the possibility of eventually moving away from negative interest rates was increasing. Ta.

The short-to-medium term uptrend remains unbroken for now, with 146.50 being the most immediate support level, followed by 145.00 and the underside of the long-term ascending channel (highlighted in blue). However, the release of US Q4 GDP and PCE data tomorrow and Friday could test the US dollar against the yen.

Today’s strong PMI data suggests the economy is growing at a decent pace, and if upcoming data raises inflation concerns and the resilient December CPI results are still fresh in traders’ minds, the USD may continue to be supported.

USD/JPY daily chart

Source: TradingView, Author richard snow

Japan-specific data is fairly sparse after the BOJ meeting, but US Q4 GD and PCE data on Thursday and Friday should lift intraday volatility before the weekend.

Better-than-expected January PMI data suggests the US economy is on track to keep pace, but markets will focus on negative data tomorrow on fourth-quarter growth record It’s going to happen.

USD/JPY will likely remain a major focus at next week’s FOMC meeting to discuss monetary policy. By then, US PCE data for December is expected to reveal that stubborn headline pressures still exist, welcoming further declines in key inflation indicators.

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnow