The Bank of Japan made an important move last week when it made clear that it will not be joining the rest of the world’s central banks by hiking rates. The Bank of Japan said it will be purchasing 10 yr JGB’s in an unlimited amount. Why did they do this? They did this because the yields had been edging higher towards the BOJ’s implied yields of +0.25%. The BoJ made clear that it would be defending this level and on February 14 this week the BoJ offered to buy 5-10 JGB’s at a fixed rate with an unlimited amount.

What does this mean?

It means that the Yen will offer a stable to slightly falling JPY given the lack of inflationary pressures in Japan. Inflation has been illusory for Japan for some time and even now the BoJ only forecasts inflation to be 1.1% through March 2023.

The euro’s funding currency status is questioned

The more hawkish tilt by the ECB means that the Euro’s funding currency status is called into question. The benefit of this is that traders will prefer to be short the Yen now rather than the Euro. This should mean that the Yen should weaken further. However, there is one risk with this. The JPY gains on risk aversion. So, when investors are worried, the JPY gains. In absence of near term market angst, the Yen should weaken against the higher beta Australian dollar and New Zealand dollar.