History repeats itself, but the thoughtless application of old patterns often leads to financial losses. When, at the end of 2022, the Bank of Japan under Haruhiko Kuroda expanded the target yield range for 10-year bonds from +/- 0.25% to +/- 0.5%, it knocked out the USD/JPY bulls. The Forex began talking about the inevitability of a monetary policy normalization process, yet the next step took about seven months.
It would seem that another increase in the trading corridor's limits should have led to the yen's renewed strengthening. However, after a slight drop, the USD/JPY quotes turned and moved upward. The old pattern didn't work. The oversight lay in Kazuo Ueda's recklessness, and also in the anticipatory yield dynamics of U.S. bonds over their Japanese counterparts.
Following the July meeting of the BoJ, its new head stated that one of the reasons for expanding the target yield range was currency volatility. This was perceived by investors as a concern about the weakening yen. The problem is that markets tend to periodically go against the central bank. They test its strength, hoping for actions that will eventually allow investors to take the right position. Forex is no exception. If the Bank of Japan is worried about the USD/JPY rally, why not test its nerves?
Market expectations dynamics for the Bank of Japan rate
The same applies to Kazuo Ueda's statement that transitioning to flexible yield control is not the start of monetary policy normalization. Such a speech led to the exact opposite of the expected result: derivatives shifted the expected overnight rate hike timeline from July to March 2024. By the end of the year, they expect borrowing costs to be at 0.1%.
The market is testing the central bank's patience, which doesn't bode well for the USD/JPY bears. Moreover, the BoJ showed that it would not allow a rapid movement of 10-year bond yields to the upper range of +/- 1%. It twice proposed buying debt securities, slowing their rates. U.S. counterparts are growing faster. The expanding yield differential between U.S. and Japanese bonds creates favorable conditions for the continued upward journey of the U.S. dollar against the yen.
Wage dynamics in Japan
Adding to this the unexpected slowdown in wages in Japan, there's no doubt in the strength of the upward trend for USD/JPY. According to the BoJ, for inflation to anchor close to 2%, wages need to grow by 3% and above.
Technically, on the daily chart, USD/JPY exhibits a consistent bullish trend, confirmed by the pair's distance from moving averages. However, the bulls' inability to push the quotes above 144.2, where the 88.6% target lies in the Gartley pattern, threatens a fall in the pair and selling on the rebound.