BOJ Promises Being Nimble

Key Takeaways

• The Bank of Japan (BOJ) ended the era of negative interest rates but will be nimble in its additional purchases of government bonds should rates rise too much.
• In typical “buy the rumor, sell the news” fashion, the yen weakened after the announcement, sending the dollar/yen higher.
• The weak yen prompted officials to warn the government is “always prepared” to intervene if the yen weakens further.
• A weaker yen generally provides a boost for Japanese exporters.

Nimble Responses

Currency markets are still adjusting to the recent changes from the BOJ and the potentially mixed signals transmitted in the stated changes to monetary policy. Last week, the BOJ announced an end to yield curve control and negative interest rates, but other statements seemed like the central bank was not quite convinced in its macro expectations. The BOJ hedged its bets by promising “it will make nimble responses” with additional purchases of government bonds if long term rates unexpectedly rise. One key takeaway here is Japanese policymakers are likely nervous about the potential for rates to rise too far and too fast.

“We Are Always Prepared”

Currency traders seemed to focus on the dovish tone as the central bank updated its policy plans. The BOJ delivered a change in policy with a carefully crafted statement to minimize any shocks as Governor Ueda kept a slightly dovish tone after the central bank hiked rates for the first time since 2007.

As the yen continues to weaken in the wake of the new policy framework, government officials elicited a warning that the government is “always prepared” to intervene if the yen weakens further.

The last currency intervention was in 2022, when the yen weakened to roughly 152 to the U.S. dollar. And in intraday trading this week, the yen slumped to a 34-year low against the dollar. For several days now, officials have warned investors of their willingness to be bold with direct intervention with the currency. The weak currency seems counterintuitive after the historic increase in rates, but investors are reading past the headlines and focusing on the BOJ’s desire to keep loose financial conditions.

One clear option for Japanese policymakers is to patiently wait for the Federal Reserve’s (Fed) next move. A cut in U.S. rates should weigh on the dollar, indirectly supporting the yen. The problem for policymakers is that the first move by the Fed is likely still months away.

Recent Decisions by Bank of Japan Frustrated Currency Traders

Source: LPL Research, Bank of Japan, 03/27/24

Call to Action

Japanese exporters could get a boost from the weaker yen as investors debate the future trajectory of Japanese markets. Currency disruptions are putting more focus on the Fed and its next move, which will most likely be in June. Despite the delay in the next action by the Fed, investors are still optimistic about holding equities, and so LPL Research recommends staying invested and maintains a neutral tactical stance on equities. We expect some volatility in the near term, but equity markets could experience a positive catalyst as the Fed cuts rates later this year and businesses keep healthy balance sheets. And within the context of a neutral stance on developed international equities, we would overweight Japan, with a slight bias toward unhedged currency strategies.