Weekly Market Outlook

Yen Pares Drop Versus Dollar After BOJ Shifts Policy Framework

The yen pared its decline versus the dollar after the Bank of Japan said it will adopt a more flexible approach to expanding stimulus and strengthened its commitment to stoking inflation over the longer term.

The Japanese currency fell 0.1 percent to 101.76 versus the greenback as of 9:18 a.m. in London. It declined against 29 of its 31 major peers, while local stocks surged.

The yen earlier dropped as much as 1.1 percent to 102.79, the weakest since Sept. 14, after Governor Haruhiko Kuroda and his board said the BOJ would move away from a rigid target for expanding the money supply, while seeking to control bond yields across different maturities. They pledged to expand the monetary base until inflation is stable above the authority’s 2 percent target — committing to an overshoot of consumer-price gains.

“We can be more sure that the BOJ wants to reach inflation, but we can be less sure that they are willing, or able to, take the necessary steps,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “I would not be surprised if dollar-yen would come down again in the coming days.”

The BOJ said its target for expanding the monetary base through asset purchases, previously set at 80 trillion yen ($780 billion) annually, may now fluctuate in the short term to enable policy makers to control bond yields. It scrapped a target for the average maturity of its government bond holdings.

The central bank kept the benchmark rate for a share of bank reserves at minus 0.1 percent, saying it can extend the negative rate if needed. Options for further easing include both increasing asset purchases and lowering target yields, Kuroda said a news conference in Tokyo. Just over half of economists surveyed by Bloomberg forecast an expansion of monetary stimulus at the end of the two-day meeting.

‘Enough Surprise’

“This has probably produced enough surprise for a market heavily short dollar-yen to take some profits,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “But we suspect dollar-yen eventually settles lower, given how vague the timetable to reach 2 percent inflation is, and also the severe doubts over whether we will ever see the happy day of inflation at more than 2 percent simply because the BOJ is talking about it.”

Japan’s currency has outperformed its developed-market peers this year, surging 18 percent against the greenback, amid doubts that Kuroda had adequate tools left to revive the economy as his goal of raising inflation to 2 percent proved elusive. The central bank’s decision to cut rates to minus 0.1 percent in January set off a rout in banking stocks and a flight to the safety of the yen.

Bullish bets on the yen currency remained close to the record high reached in April in the week ended Sept. 13 as hedge funds and other large speculators added to wagers that sought to profit from its strength since the start of the year, data from the Commodity Futures Trading Commission show.

Fed Ahead

Investors are now awaiting the Federal Reserve’s interest-rate decision later Wednesday as a driver for the dollar’s outlook versus the yen. The Bloomberg Dollar Spot Index, a measure of the greenback against 10 major peers, was little changed after climbing earlier by as much as 0.3 percent.

“The BOJ said it can still undertake further easing, and given its new framework will allow it to undertake more negative rate cuts while mitigating the downside impact on financial institutions’ profitability, the risk is for more easing action in the fourth quarter,” said Mansoor Mohi-uddin, a Singapore-based strategist at Royal Bank of Scotland Group Plc. “Coupled with the prospect of the Fed hiking before year end, dollar-yen should trade into a higher 105-110 range as we enter the last quarter of the year.”