Yen Falls Against the USD as BoJ Forecasts High Inflation to Persist

On Tuesday, the Bank of Japan (BOJ) tweaked its bond yield control policy to relax the grip on long-term interest rates, taking another small step away from its ultra-dovish policy. However, due to BOJ’s plan to gradually dismantle monetary stimulus and its projections that inflation would not drop below 2% before 2025, the yen (JPY) dropped against the dollar (USD) and crossed the 150 level.

JPY Falls to 150.6 Per Dollar

The Japanese central bank adjusted its bond yield control policy again on Tuesday, loosening the reins on long-term interest rates. The move, aimed at dismantling the monetary stimulus supplied over the past decade, saw the BOJ tweak its 1% cap on the 10-year bond yield, which it imposed three months ago to raise long-term borrowing costs. 

The BOJ board also amended its price forecasts to forecast that inflation will easily exceed 2% in 2023 and 2024, pointing to growing convictions that the bank is laying the groundwork to phase out its super-dovish policy. 

However, the Japanese yen still tumbled against the dollar on the day as traders reacted to the BOJ’s stance to patiently maintain loose monetary policy and project inflation would fall below 2% in two years. The JPY was down 1.1% at 150.6 per dollar when writing. 

“We still haven’t seen enough evidence to feel confident that trend inflation will (sustainably hit 2%). As such, we don’t see a big risk of being behind the curve.”

– BOJ Governor Kazuo Ueda said during a press briefing.

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Why is the Yen Under Continued Pressure?

The latest downswing in JPY against the USD comes mainly due to a significant contrast in monetary policies between Japan and the US. Specifically, the Federal Reserve and other global central banks have been aggressively raising interest rates over the past year and a half to rein in record-high inflation.

But BOJ wasn’t among those central banks and has instead opted to keep its ultra-dovish stance amid rampant inflationary pressures. 

By resisting urges to impose near-term rate hikes, the BOJ exposed the yen to substantial pressure, forcing it to intervene in the Forex market in October 2022 to prop up the currency. 

After sliding below the psychological threshold of 150 earlier in the year, after which the Japanese Finance Minister hinted at another possible intervention. Earlier this month, the country’s authorities refrained from disclosing whether they had stepped into the market to shore up the JPY, keeping traders on alert to buy the yen on intervention news. 

Do you think the yen will remain under pressure if BOJ clings to a dovish policy? Let us know in the comments below.