MNI POLICY: Weak Yen Concerns Behind BOJ's Shock Yield Shift

Concerns the yen would weaken as commodity prices rally on hopes for a Chinese economic recovery next year fed into the Bank of Japan's decision to lift the upper band on its 10-year yield target, MNI understands.

The rally in the yen triggered by Tuesday's shock move to lift the 10-year yield upper limit to 50bp has provided an opportunity for businesses that import raw materials to buy U.S. dollars more cheaply. The yen last traded at 131.8 against the U.S. dollar compared to 137.4 immediately before the BOJ's announcement on Tuesday. The BOJ attributed the policy shift to a need to improve bond market functioning. (See MNI BOJ WATCH: Kuroda Dismisses Shock Shift As Tighter Policy)

Bank officials have acknowledged the yen’s fall this year was caused by the widening interest rate gap between the U.S. and Japan, but they also saw an increase in demand for dollars as a contributor to the yen’s decline.

The Chinese economy will be fragile in the short term amid an increase in infections after the government eased its Covid policies. BOJ officials believe China's economy will be under pressure in the first quarter of 2023 but will likely pick up afterward, which will increase demand for resources and place upward pressure on commodity prices. This will strengthen the dollar and weaken the yen.

The Ministry of Finance would not necessarily conduct a yen-selling intervention should the dollar move above JPY145, the level at which the government intervened on September 21 for the first time in 24 years. The yen continued to weaken after the intervention, eventually hitting a low of 150 in late October.

Bank officials see the possibility that global inflationary pressure will strengthen again due to higher commodity prices, which will worsen Japan's terms of trade and squeeze Japanese corporate profits.

The BOJ’s decision to widen the range on the 10-year bond yield to 50bp from 25bp triggered speculation about the possibility of more policy action, which should limit selling pressure on the yen ahead of the end of fiscal year in March. The government has a desire to prevent the yen from weakening ahead of the fiscal year end, at time when businesses settle their accounts.

The BOJ decided to revise the 10-year yield target without a comprehensive policy review. The governor and his colleagues had previously said a widening of the range would be substantially equivalent to a rate hike and undesirable for Japan’s economy.