Despite statements that there won’t be any fundamental change in monetary policy, investors do not believe BoJ. It has already made adjustments to the yield curve control policy. What about the USDJPY? Let’s talk about this topic and make up a trading plan.
Weekly yen fundamental forecast
The longer one delays making an important decision, the worse the consequences. The BoJ took a step by widening its 10-year bond yield target range from +/-0.25% to +/-0.5% and the derivatives market expects it to go on. The BoJ should continue normalizing monetary policy. Futures signal another half-a-point widening of the trading range, while interest rate swaps suggest an interest rate hike by 24 basis points in 2023. Buying on the expectation pushed the yen against the US dollar to a six-month high. And although the USDJPY bears seem a bit discouraged, they should go ahead soon.
Although the Bank of Japan says that its December decision does not mean a fundamental change in monetary policy, the market interprets the words of Haruhiko Kuroda just like the speeches of Jerome Powell. Investors don’t trust the regulators. The Fed is trying to prove that it will continue to raise the federal funds rate in the long run; the BoJ insists that it will remain passive. It goes into open confrontation with the market because, if not for the control of the yield curve, 10-year bond yields would be much higher.
Dynamics of actual and implied Japanese bond yield
Source: Bloomberg.
The unscheduled purchases of Japanese bonds in early 2023 is another proof that there is a struggle. Last week, the BoJ announced its willingness to purchase an unlimited amount of 2-year and 5-year bonds, as well as papers with a maturity of 1 to 25 years in the amount worth ¥600 billion. This way, the Bank of Japan could buy out almost the entire bond market. It already owns half of it.
However, there is another way – to surrender. The regulator could continue normalizing its monetary policy by widening the target range and raising its interest rate, as investors expect. The longer the regulator resists, the worse the consequences will be. The lack of liquidity in the Japanese bond market, coupled with shrinking liquidity in the global debt market, could trigger a collapse.
Curiously, the Bank of Japan has already reduced the volume of stock ETFs purchases to the lowest level since March 2021. That is, some measures concerning monetary normalization are already underway, so is it worth delaying decisive steps?
Dynamics of BoJ’s purchase of stock ETFs
Source: Bloomberg.
The USDJPY downtrend started because of the Fed’s willingness to slow down its monetary tightening pace and the BoJ’s decision to follow the path of monetary normalization. The trend should continue in 2023. Besides, the US Treasury yields are down amid investors’ concerns about an upcoming recession in the US economy.
Weekly USDJPY trading plan
Thus, it is still relevant to sell the USDJPY down to the previously indicated targets at 130.2 and 127.6 on the corrections. If the price doesn’t go above the resistance at 132.65, it will also be relevant to sell.
Price chart of USDJPY in real time mode
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