BOJ Navigates Interest Rates and Yen Appreciation

1 Feb 2023

The Japanese yen has appreciated past 130 per dollar and is heading back to its strongest levels in almost eight months. This is mainly due to a general weakness in the dollar, with expectations that the Federal Reserve will slow the pace of its interest rate hikes. The Bank of Japan recently held a policy meeting in January, where policymakers debated the inflation outlook and the likelihood of a sustainable rise in wages, while also emphasizing the need to keep monetary policy accommodative. Despite speculation about another policy adjustment, the central bank maintained its ultra-low interest rates and left its yield control policy unchanged. BOJ Governor Haruhiko Kuroda reemphasized that the 2% inflation target must be achieved in a sustainable manner. Traders will be keeping a close eye on the BOJ's policy meeting in March and April when a new BOJ governor takes office. The yield on the 10-year JGB rose to 0.5%, approaching the upper range of the Bank of Japan's tolerance limit, as investors digest the Summary of Opinions document from the recent policy meeting. This was the highest level since the eight-year peak of 0.506% on January 17th, before the BOJ defied speculation and left its yield curve control policy unchanged at 0.5%. Despite the Summary indicating that the body does not see any changes to the yield curve thresholds in the near future, high inflation adds pressure to drop the ultra-loose policy before a new governor is appointed in April. The Nikkei 225 Index rose 0.07% to close at 27,347 while the broader Topix Index shed 0.15% to 1,972 in mixed trade on Wednesday, with Japanese shares struggling for direction as caution dominated sentiment ahead of a highly-anticipated interest rate decision from the US Federal Reserve. Mixed domestic corporate earnings also weighed on sentiment, as well as lingering uncertainties about new export restrictions in China that may affect Japan’s chip equipment sector. Japanese shares traded mixed on Wednesday, with gains from index heavyweights such as SoftBank Group (1.8%), Tokyo Electron (2.1%) and Nippon Yusen (3.3%), while losses were seen from Mitsubishi UFJ (-0.4%), Sony Group (-1%) and Fast Retailing (-0.6%). Elsewhere, Lasertec plunged 13.8% after missing earnings and revenue estimates in the latest quarter.