The Japanese currency fell sharply Tuesday, on track for its weakest close versus the U.S. dollar in 33 years, after the Bank of Japan took another baby step toward abandoning its controversial policy of yield-curve control.
The U.S. dollar retreated versus the Japanese currency USDJPY, +1.66% following the report Monday, dropping to a two-week low below 149 yen. It rebounded sharply after the BOJ announced its tweak to the cap. It was up 1.6% at 151.445 yen in North American afternoon trade. But analysts and economists argued that an incremental loosening of yield curve control, or YCC, and a slow walk toward normalization of monetary policy makes sense as the BOJ is the only major central bank where official interest rates remain negative.
Meanwhile, the approach announced Tuesday is “way of softening what used to be the yield cap without repeating the July move and raising the cap 50bp ,” said Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, in a note. Of course, it’s a two-way street. The slow approach taken by the BOJ appears to reflect a judgment that it can’t stand in the way of spillovers from higher U.S. yields that would drive up JGB yields. That would force the BOJ into very large-scale purchases and risk extensive market dysfunction, Guha wrote.
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