FX.co ★ Yen: the show must go on!

The Japanese currency is basking in glory. The yen has risen sharply on many fronts thanks to the Bank of Japan's unexpected move in a hawkish direction.

The BOJ became the main newsmaker in the currency market on Tuesday. The central bank did not throw out a white flag and did not move to the hawk camp, but made traders question their loyalty to the dovish course.

At the end of the 2-day meeting, the BOJ kept ultra-low rates. The central bank kept unchanged its yield curve control (YCC) targets, set at -0.1% for short-term interest rates and around zero for the 10-year bond.

The only move the central bank has allowed itself is to make a change to its yield curve policy. 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.

Later, BOJ Governor Haruhiko Kuroda said that this was a technical measure aimed at improving the way the bond market works. He stressed that the correction of yield curve control is in no way a form of monetary policy tightening.

However, a big flame, as you know, cannot be blown out. Traders, having received even an implicit hawkish signal from the central bank, still interpreted it as a step towards a possible rejection of the current monetary policy.

Speculation on a potential pivot of the BOJ has spurred demand for the yen. Yesterday, JPY showed amazing growth on many fronts.

The yen rose 3.5% to a September high of 140.17 against the euro. And JPY surged 3.7% to 160.34, the highest since October 12, against the pound.

However, the Japanese currency showed the best dynamics against the US dollar. On Tuesday, the yen soared almost 4% against the greenback. The intraday high was 130.58. The last time the JPY traded at that level was in early August.

Analysts explain the yen's rapid rise as global markets jolted to the untimely news about changes in the YCC policy.

A lot of people were waiting for the first hawkish step from the BOJ, but they didn't expect such a sudden move to be made now.

Most investors were betting on April, which is when the current BOJ head Kuroda is due to resign. That is why the BOJ's decision was so surprising.

According to experts, in the coming days, emotions should cool down a bit, and traders will carry out serious analytical work. Now it is very important to understand how real the chances of a hawkish pivot from the BOJ are in the foreseeable future.

If investors believe Kuroda, the yen might pull back again. But its fall against the dollar is unlikely to be as strong as before, as the US currency itself is under a lot of pressure.

Now we see the dollar retreating on all fronts. While the DXY index was up 19% year-over-year at the end of September, it is now down just 9%.

The key bearish factor for the greenback is growing market fears that the Federal Reserve is nearing the end of its massive interest rate hike cycle.

The dollar's fundamental advantage is melting before our eyes, which is adding strength to many currencies, but it is the yen that is winning the most in this situation.

At this stage, the USD/JPY bulls fear a potential reduction in monetary divergence between the US and Japan. Given that this risk is set to rise in the future, analysts are drawing a rather gloomy future for the asset.

Most experts are confident that the pair will continue to decline in the medium term. But how deep can it go? We don't want to scare you, but the outlook from Societe Generale bank analysts is not at all bleak.

The Bank of Japan's sudden policy adjustment is ramping up pressure on the country's international investors to hedge their foreign assets, a move that could send the yen even higher, according to Societe Generale SA.

"The currency could strengthen to 125 per dollar in January," said Kit Juckes, SocGen's chief foreign-exchange strategist.