Yen volatility… While examining the recent volatility movements in the Japanese yen, we monitor developments in the axis of pigeon monetary policy, yield control, which is the main reason for the currency's loosening. In this direction, while the depreciation pressure on the yen continues, the Japanese Ministry of Finance has directed that the yen can be intervened if necessary.
Yield control policy operability… The Bank of Japan kept its monetary policy stance unchanged at the last meeting, but in an important development, it strengthened its commitment to limit any increase in Japanese bond yields. It kept its target for 10-year Japanese government bond (JGB) yields at 0.00%. Most importantly, BOJ policymakers said the central bank would purchase the required amount of government bonds without setting an upper limit, so 10-year JGB yields would stay near that target. Specifically, the BOJ said it will offer to purchase 10-year JGB at a rate of 0.25% per business day through flat rate purchases. If the 10-year returns remain below the 0.25% band and regress, we will assume that this control policy of the BOJ is working.
USDJPY 1-month volatility chart vs JPY… Actual or historical volatility reflects the actual volatility derived from spot prices of a time series currency over a given historical time horizon. Actual volatility is calculated by annualizing the standard deviation of periodic logarithmic returns over the historical time horizon. Source: Bloomberg
Conclusion? Given suppressed growth and moderate inflation, the Bank of Japan is clearly satisfied with its supportive monetary policy stance. The only factors that might prompt the Bank of Japan to consider policy adjustment may be operational or implementation issues. However, the Bank of Japan may need to purchase large volumes of JGB to keep returns limited. No meaningful foreign exchange intervention may be expected from the Japanese authorities to support the yen until the JPY exchange rate is 140 or higher. In general, no change is expected in the Central bank's 0% 10-year JGB return target with a tolerance range of +/-25 bps for the foreseeable future.
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