Monetary Policy Divergence Will Continue to Weigh on Yen

The Japanese yen (^USDJPY) tumbled more than -2.3% today after the Bank of Japan (BOJ) maintained its ultra-loose monetary policy, worsening its policy divergence with its global peers.  The yen is just above Wednesday’s 23-year low of 135.59 per dollar and could continue even lower.

The BOJ today, in an 8-1 vote, maintained its policy balance rate at -0.1% and kept the 10-year JGB yield target at about 0%, in line with consensus.  Speculation had been building this week that the BOJ might signal that it would be ready to tighten its policy.  However, the BOJ resisted the intensifying wave of global central bank tightening that left it as the only major central bank to continue to pursue QE and record-low interest rates. 

BOJ Governor Kuroda is pushing back against mounting pressure to normalize policy as other central banks race to end QE policies and raise interest rates.  Kuroda said today that BOJ is not thinking about raising the upper limit on the 10-year JGB yield ceiling target range, and that any tightening of monetary policy would add downward pressure on the economy. 

The BOJ Wednesday boosted QE to keep bond yields from rising when it announced unlimited purchases of cheapest-to-deliver 10-year JGB bonds in a bid to support JGB futures prices. The BOJ is trying to keep bond yields from rising after the 10-year JGB bond yield Wednesday jumped to a 6-1/2 year high of 0.308%, well above its 0.250% upper limit on its 10-year JGB yield ceiling target range.

The yen may continue to fall with BOJ Governor Kuroda’s insistence that now is not the time to tighten policy like other global central banks are doing.  The BOJ today downgraded its assessment of production, exports, and overseas economies while taking an improved view of consumer spending. The downgrades offer some support for its view that the Japanese economy still needs help to recover.  Mitsubishi UFJ Research & Consulting said the yen will likely remain under pressure at least toward the next Fed meeting in July.

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