FX.co ★ USD/JPY: Bank of Japan Meeting Results

The Bank of Japan disappointed USD/JPY sellers: firstly, the regulator retained all parameters of monetary policy as they were (though this was expected), and secondly, it did not signal any intentions to change the ultra-loose monetary policy in the future (contrary to the expectations of most experts). The traders' reaction did not take long to materialize: in just a few hours, the price jumped by almost 300 points, approaching the 145 figure. And judging by the dynamics of the upward movement, this is not the limit. USD/JPY buyers clearly intend to conquer the 146 figure, and in the perspective, they are ready to return to the boundaries of the 150 price level if the fundamental background contributes to it.

In general, regardless of the motives behind today's decision of the Japanese regulator, it is necessary to acknowledge a significant failure in communication between the Central Bank and the markets. The head of the Bank, Kazuo Ueda, "heated up" the public with his hawkish statements a few weeks ago, thereby setting in motion the wheel of corresponding expectations, but ultimately showed no signs of moving towards exiting negative rates. The Bank of Japan maintained a "dovish" rhetoric in the accompanying statement, stating that the central bank will continue to support financing stability "and will take additional easing measures without hesitation if necessary."

To be fair, it is necessary to note that a few days before the December meeting, the Japanese regulator (apparently anticipating undesirable volatility) leaked an insight, voicing unequivocal messages: a) the Central Bank will not rush decisions; b) there will be no changes in December; c) much will depend on wage dynamics next year. This insight put pressure on the yen (USD/JPY buyers played almost 200 points), but it did not stop the wheel of hawkish expectations, as evidenced by today's reaction of traders to the results of the December meeting. Although, in a large sense, the insight was confirmed – so to speak, in all respects. But market participants were still not ready for the realization of the "standard-dovish" scenario.

On the one hand, the probability of revolutionary changes in December was minimal. On the other hand, after such bold reasoning by Ueda within the walls of parliament (and following a meeting with the country's prime minister), traders expected at least a hint of the upcoming calibration of the ultra-loose policy. Instead, Ueda stated at the press conference that, if necessary, he would take additional easing measures without hesitation. At the same time, he added that the central bank is not in a situation to predict sustainable, stable inflation with sufficient confidence.

Ueda indicated that the Bank of Japan intends to wait for the results of the annual negotiations between representatives of trade unions and businesses in the coming spring before making serious decisions about the bank's policy. According to him, central bank members want to ensure that wage growth in 2024 will be "sufficiently strong" to support consumption. Given this position, it can be assumed that the issue of calibrating the ultra-loose monetary policy will not be relevant until April—it will likely be considered in a practical sense at the June meeting (of course, if the stated conditions contribute to it).

The six-month time lag has hit the Japanese currency, especially since the path to policy normalization remains highly uncertain.

Nevertheless, Ueda did voice certain signals of a "hawkish" nature, albeit in a veiled manner. However, these signals were somewhat obscured. For example, he stated that the market should have the opportunity to anticipate changes in the Bank of Japan's policy – at least "to some extent." Ueda also acknowledged "certain negative effects of the negative interest rate policy on the profitability of financial institutions" (while immediately adding that banks still demonstrate high profits).

However, all these signals did not impress the markets. The yen came under strong pressure due to the "expectation/reality" effect. Trader expectations of hawkishness were completely unmet – neither in the "moment" nor the future. The regulator continues to implement an ultra-loose policy and signals that it is not ready to abandon it in the foreseeable future.

Now, the decline in USD/JPY is only possible due to the weakening of the greenback, that is, due to "dovish" decisions by the Federal Reserve. The yen has lost a crucial fundamental advantage and has returned to the orbit of the influence of dollar bulls. In the near future (until the release of the core PCE index, expected on Friday), the pair is likely to demonstrate impulsive growth. The immediate target of the upward movement is the 146.10 level – the middle line of the Bollinger Bands indicator on the D1 timeframe. It is too risky to engage in selling now, considering the current fundamental background.