Going into the BoJ meeting, there had been expectations that the BoJ may signal hiking interest rates as a way to deal with the pervasive weakness in the JPY. In the event, the BoJ kept rates at -0.10% and also maintained its yield curve control at 0%. The focus then quickly changed as to whether BoJ’s Governor Kuroda would give any hints on FX intervention in the press conference.

Press conference highlights

Comments on FX intervention were circumspect, which is certainly a sensible policy by the BoJ. Kuroda said that he had ‘no comments’ on FX intervention. However, he did say that the government had taken appropriate action against excessive FX volatility and the yen weakening had been one-sided. Kuroda also said that BoJ’s monetary policy does ‘not target FX rates’ and that Japan has a history of suffering from the strong yen.

Push back against US differential narrative

It was also interesting to see Kuroda pushing back against the interest rate differentials between Japan and the US. Kuroda said that it is not correct to explain the USD strength only based on interest rate differentials. He said that the US-Japan interest rate differentials had little correlation with the USDJPY rate when looking at past levels. This seems a strange statement given how the interest rate differentials have been driving the USDJPY higher all year and have been in virtual lockstep for years.

The takeaway here is that the BoJ is really continuing to hold out for the Fed to start slowing the path of hiking rates. This is the most likely source of more straightforward JPY strength that does not have to be artificially generated by the BoJ. Also, it means that speculation the BoJ is going to exit its ultra-loose monetary policy can end for now. It also means that a dovish Fed pivot later today, if it should happen, would make a USDJPY short attractive for some traders. You can read the full BoJ statement here.