The beginning of the week gave USD/JPY traders an unexpected surprise. The Bank of Japan announced that it will review its policy of yield curve control and it has already taken the first step in this direction.
Talks on possible changes in the BOJ monetary policy have been going on in the market for a long time. However, a lot of people did not take them seriously.
Few people believed that the BOJ would dare to make any changes while BOJ Governor Haruhiko Kuroda, a notorious dove, was at the helm.
The Japanese central bank said Tuesday morning that it is keeping the general parameters of its ultra-soft policy unchanged: interest rates remain in negative territory, and government bond yields remain at about 0%.
This stance met the market's dovish expectations, and the USD/JPY might have continued rising had the BOJ not prepared a grand surprise
The surprise factor was the BOJ's alteration of the Yield Curve Control (YCC).
In a move explained as seeking to breath life back into a dormant bond market, the BOJ decided to allow long-term government bond yields to move in a wider range.
According to the BoJ, 10-year JGB can now move 50 basis points either side of its 0% target. This is wider than the previous 25 basis point band.
Recall that previously the BOJ vehemently defended the permissible limit of fluctuations in 10-year JGB, so the market perceived the current YCC correction as a clear hawkish shift in the central bank's monetary policy.
Against this backdrop, the yen showed a significant rise against the dollar. It jumped 2.8% and tested a 4-month high at 133.21.
Further, USD/JPY dynamics depend on what Kuroda will say at the briefing today. Ahead of his speech, the market speculations about a possible BOJ pivot are increasing.
Those who are bullish on the yen hope to hear additional hints on refusal of a dovish policy. However, most currency strategists still remain realistic.
Despite the BOJ's latest shocking statement, analysts are confident that Kuroda will remain the same. They expect him to once again emphasize the need to maintain the ultra-low rate policy until the central bank achieves a sustainable inflation rate of 2%.
If Kuroda's stance seems too dovish for traders, it will help the dollar to restore its lost positions against the yen.
According to experts, this is the most realistic scenario. A complete capitulation of the BOJ in the near future is unlikely. The BOJ will stick to its current tactics until Kuroda's resignation in April next year.
Until that time, the yen is likely to remain under pressure, but the force of the downward factor will not be as destructive as before.
Expectations for a change of leadership at the BOJ and a slowdown in US tightening should support the JPY in the first quarter of 2023.