Yen Softens as Senior BoJ Official Favours a Cautious Exit from Negative Rates

USD/JPY News and Analysis

Senior BoJ Official Reaffirms Cautious Approach in the Lead up to Normalisation

Comments from the Bank of Japan’s Deputy Governor Shinichi Uchida has softened the yen on Thursday morning as the senior official issued a glimpse into the thinking of the policy setting committee. Uchida essentially confirmed that the Bank would revise its stimulus measures if the price goal of 2% is met sustainably and remains stable – one of the two thresholds that need to be met before officials can think about raising interest rates.

He went on to clarify that even once the Bank adjusts the interest rate to zero or into positive territory, additional hikes may not be forthcoming. Since markets are already pricing in an exit from negative interest rates, the focus now shifts to the timing and magnitude of interest rate hikes. Uchida’s comments are followed closely as he has been known for providing key policy hints in the past.

However, not all support is expected to stop. Uchida intimated that the BoJ will not stop its bond buying even after bringing yield curve control to an end. The idea here is to retain control on borrowing rates to stop a scenario where rising interest rates weighs on economic activity.

The yen continues its broad decline from yesterday as can be seen by the constructed Japanese Yen Index below. The index is an equal-weighted average of four popular Yen pairs and helps provide an indication for the value of the yen.

Japanese Yen Equal Weighted Index (USD/JPY, GBP/JPY, EUR/JPY, AUD/JPY)

Source: TradingView, prepared by Richard Snow

USD/JPY Inches Higher – 150 Back in Sight

USD/JPY makes progress towards potentially testing the psychological 150 mark, and a notable pick up in economic data in the US adds to the recent upside potential, although, it must be noted that the dollar has eased this week.

The pair trades well above the 200-day simple moving average (SMA) and currently tests the recent swing high set in January. Fed speak this week has remained fairly neutral in that there is still an expectation of multiple rate cuts this year despite the resilient US economy. One hint that interest rates may not drop as low as markets anticipate came via the Minneapolis Fed President, Neel Kashkari as he suggested current interest rates may not be all that restrictive if you consider the neutral rate is higher than before. The neutral rate is a theoretical level of interest rates that is neither stimulatory or restrictive in nature.

The bullish move will need to be monitored but as the year progresses, momentum is likely to favour downside setups, particularly in the lead up to the March and April BoJ meeting which are being monitored for that all important rate increase. The BoJ are taking a long run up, communicating their intentions well in advance of withdrawing from negative rates in the hopes of maintaining stable market conditions when the Bank does eventually enter non-negative territory. Support remains at 146.50, followed by the swing low at 145.89.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX