The yen climbed against all of its major peers after a report that the Bank of Japan plans to discuss tweaking its yield curve control policy when it meets Friday.
The Japanese currency rallied as much as 2% against the euro, the most since March, and rose 1% against the dollar. The BOJ will consider letting long-term interest rates rise above its 0.5% cap by “a certain degree,” Nikkei reported, without attribution.
Markets have been awash with speculation in recent weeks that the BOJ — which holds its policy meeting on Friday — will finally move to stop capping yields on government bonds after modifying its approach late last year. Traders have ramped up protection against a surge in the yen, which would likely strengthen if the ceiling was ditched.
“While speculation of a policy tweak has been wrong before — and reports suggest only that the BOJ will “discuss” a YCC tweak — rising inflation, rising wages and the sheer scale of BOJ purchases suggests that the time for some adjustment is coming,” said Shaun Osborne, chief foreign-exchange strategist at Scotiabank.
Japanese bond futures slumped on the report, falling 87 ticks, the most since March on a closing basis.
Policy makers sent waves across financial markets in December when they announced they would allow Japan’s 10-year bond yields to rise to around 0.5%, double the previous upper limit of 0.25%. The yen rose sharply as yields on government bonds jumped, with the fallout touching everything from US stocks to the Australian dollar and gold.
Japanese investors are the biggest foreign holders of US government bonds and own everything from Brazilian debt to European power stations to bundles of risky loans stateside. Some market participants worry that higher yields at home might tempt them to switch out of these overseas investments.
Leadership Change
A leadership change at the BOJ helm earlier this year made investors even more expectant for the end to a decade of ultra-low interest rates that sent a wall of money overseas and punished domestic savers. But since then, investors have seen little progress.
“Judging by this price action, the impact of tweaking or ending YCC will very likely spill over and push other global yields higher as well,” said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. Yields on US Treasuries extended higher following the Nikkei report.
Any shift could also be transformational for the yen. Japan’s ultra-loose monetary policy has weighed on the currency as central banks elsewhere have aggressively hiked rates to battle inflation, with the yen losing about 6% against the US dollar this year.
Even a small increase in the cap on yields would likely support the currency. “If they end up adjusting tolerance by 25 basis points, then USD/JPY will get closer to 135-136 area,” said Bipan Rai, CIBC’s global head of foreign-exchange strategy. “Complete abandonment of the control takes us closer to 120 over time.”
The yen was little changed in early Friday morning in Tokyo around the 139.50 per dollar level, having gained 0.5% Thursday.
--With assistance from Ye Xie and Carter Johnson.
(Adds context and Japanese bond futures move.)