Yen surges ahead of BoJ’s yield curve control

The Japanese Yen has strengthened against the US dollar following a report by Nikkei Asia that the Bank of Japan is prepared to adjust its Yield Curve Control (YCC) framework to allow the yield on the 10-year Japanese government bond to rise above 1%.

This move is seen as necessary due to the Federal Reserve’s higher interest rate framework pushing Japanese government bond yields in that direction. The USD/JPY pair fell more than 100 basis points on the BoJ yield curve rumor.

The BoJ is not expected to raise interest rates, but with inflation running above its 2.0% target, adjusting its YCC mechanism could support the Yen. The Fed’s November 1 policy meeting will also impact USD/JPY, with only a 1.4% chance of a rate hike of 0.25% according to the CME Fedwatch tool.

The BoJ policy meeting on October 31 will be the key market mover for the Yen this week. Traders will be mainly focused on the BoJ’s inflation forecast. If the BoJ forecasts higher inflation in 2024, it might decide to tweak the YCC mechanism, which maintains 10-year JGB yields below 1.0%. If controls are relaxed to provide some tightening to the economy, this could support the Yen and be negative for USD/JPY.

The Fed’s November 1 policy meeting will be another key event for USD/JPY, with focus on Federal Reserve Chairman Jerome Powell’s press conference after the announcement.

If Powell emphasizes the likelihood that the policy rate could rise in the future or remain “higher for longer,” the market may buy the US Dollar, pushing USD/JPY back up.