Change in Bank of Japan policy triggered yen’s surge

On Tuesday, the yen jumped to its record highs in four months. The surge was caused by an unexpected announcement made by the Bank of Japan of a change in its bond yield control program.

Although the general direction of the bank’s policy remained the same, the main financial institution of Japan decided to expand a range of long-term yields to a diapason from -0.5% to 0.5%. The previous range for yield fluctuations in the benchmark government bonds was between -0.25% and 0.25%.

These measures had an impact on investors, who were already concerned about possible effects of rate hikes on the economy.

As North American head of FX strategy at CIBC Capital Markets Bipan Rai commented, the changes made by the Bank of Japan to its bond yield control policy immediately became an important driver in the forex market.

He also added that midterm risks are now shifted towards downside for the dollar/yen pair, and they may spread to other currencies as well, taking into consideration how vast the dollar/yen market is.

Jane Foley, head of FX Strategy at Rabobank, also shared her opinion on the situation. She noted that by taking such steps, the Bank of Japan allows a possibility of further monetary tightening, from the markets’ point of view. As stated by Foley, the markets expect it to happen in spring. Moreover, according to her words, there might be a possibility of dollar-yen falling to the level of 125.