Central Banks In Action, USD/JPY Rally 2 Percent

The surge in USD/JPY occurred because the Japanese central bank (BoJ) took drastic measures to stem the rise in JGB bond yields.

The US Dollar exchange rate had skyrocketed up to 2.5% to around 125.11 against the Japanese yen in trading in the Asian session this Monday (28/March), although it was then moderated to around 123.35 at the start of the New York session. The surge in USD/JPY occurred because the Japanese central bank (BoJ) took drastic measures to stem the rise in JGB bond yields.

USD/JPY Daily chart via TradingView

The increase in the benchmark interest rates of various central banks has triggered a bullish trend in global bond yields. Even though the BoJ did not raise interest rates like other major central banks, yields on Japanese government bonds (JGB) also soared. In fact, the BoJ implemented a yield targeting policy (Yield Curve Control) in the nearly zero range with an upper limit of 0.25%.

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In order to stem rising yields, the BoJ today announced an offer to purchase an unlimited number of 5 to 10 year JGBs. The offer will be valid for the next three days.

The BoJ's moves haven't been able to depress the yield on the JGB 10Y, but have sparked a slump in the yen exchange rate. The yen is not only falling against the US dollar, but also against the euro which incidentally is still burdened by the uncertainty of the Russia-Ukraine war.

"On a net basis, JGB has mostly abandoned actions that are simply repeated attempts to protect the 10Y yield cap, but signal (this move by the BoJ) towards an expansion in the money supply (money supply) that is contributing to a weaker yen together with a more dominant (Federal Reserve rate hike) effect on the dollar," said Derek Holt, head of capital markets economics at Scotiabank Economics, as reported by Reuters.

Colin Asher, senior economist at Mizuho, also said that a rising energy commodity import bill and a slump in Japan's tourism revenues are likely to keep the yen weak throughout next year. It should be noted that Japan is a net energy importer country, because foreign supplies meet around 94% of its energy needs.

Also Read : BOJ Minutes: Japan's Inflation Will Exceed Central Bank's Target

The critical fundamental situation for the yen and euro is actually beneficial for the US dollar. The US dollar index, which measures the greenback's exchange rate versus a basket of major currencies, has now climbed back up above the 99.00 threshold -the highest range since May 2020-. The bullish trend of the US dollar has the potential to intensify if the release of US Non-farm Payroll data on Friday shows bright numbers.

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