In today's (June 14th) interest rate decision, the Bank of Japan maintained its short-term interest rate target at 0% to 0.1% and announced that it will reduce the amount of Japanese government bonds purchased each month, but the specific 1-2 year bond purchase plan will be determined at the next meeting.

The Bank of Japan stated that despite some weaknesses, Japan's economy has moderately recovered. The financial environment in Japan has remained accommodative. The bank expects the core CPI to rise gradually, and although the impact of price increases remains, private consumption remains strong. In addition, the bank also emphasized the need to pay attention to the yen exchange rate and the impact of the exchange rate on inflation.

After the interest rate decision was announced, the US dollar rose 90 points against the yen in a short term, approaching the 158 level. The Nikkei 225 index opened up 0.5% at noon, and the Topix index rose 0.7%. The 10-year Japanese government bond yield rose from 0.93% to 0.943% in a short term.

The market generally expected that this meeting would remain unchanged and would announce the bond purchase scale. Therefore, market participants are more concerned about possible changes in the Japanese policy statement to find new clues about the timing of the central bank's next rate hike. The currency market currently expects the Bank of Japan to raise interest rates by about 16 basis points in October, and nearly 22 basis points at the December 19th meeting.

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The US-Japan interest rate differential remains the "Achilles' heel" of the yen.

Before the interest rate decision was announced, the US dollar's trend against the yen fluctuated. In the Asia-Pacific trading session, it continued to rise, reaching a level of 157.37. Then, just before the decision was about to be announced, it suddenly dived 30 points in a short term, falling to around 157.10. After the interest rate decision was announced, it rebounded sharply to a new high for the day.

Pablo Piovano, a senior analyst at FXStreet, said that from a technical point of view, "it is expected that the US dollar will continue to rise against the yen, with the first target being the weekly high of 157.71 set on May 29th, followed by the annual high of 160.20 on April 29th, 2024." On the downside, he said, "the June low of 154.52 becomes the initial support point, followed by the weekly low of 153.60 touched on May 16th."

Takahide Kiuchi, Executive Economist at Nomura Research Institute, said that the dynamics of the US dollar against the yen are unlikely to change for the time being, putting the yen in a weak position, which may require the market to change its expectations of US interest rate trends to reverse the situation. "The effect of foreign exchange intervention will not be very large, it will only buy time," he said. However, it is clear that the market's expectations of the Federal Reserve's interest rate trend mentioned by him are still developing in a direction that is not favorable to the yen. In the latest Federal Reserve interest rate decision, Federal Reserve Chairman Powell severely dampened the market's expectations of rate cuts, and the expectation of rate cuts within the year fell to once.

In addition to the short-term, technical US-Japan interest rate differential pressure, in the view of Robin Brooks, former Chief Currency Strategist at Goldman Sachs and current researcher at the Brookings Institution, Japan's huge government debt, at least for the time being, may also undermine any efforts by Japanese authorities to support the yen. According to data from the International Monetary Fund (IMF), this debt has expanded to more than 250% of Japan's economy, exceeding any other economy that has been counted. Brooks said that this gives the Bank of Japan a strong incentive to maintain low interest rates to reduce government costs. The result is: unless there is a change in policy, high debt levels will offset any efforts to push up the yen exchange rate.

"This is actually fundamentally about debt. Too much debt forces Japan into a very difficult situation, having to maintain low interest rates, transferring the financial distress pressure to the yen," he said, "Usually, even if the government has high debt, it can use the central bank to maintain low interest rates to alleviate pressure. So Japan has been doing this, and Europe has been doing this, but there are consequences. The consequence for Japan is a significant weakening of the yen."He added that, although the Bank of Japan has allowed the interest rates on government bonds to fluctuate within a broader range, the yield on 10-year Japanese government bonds is still only around 0.9%, while the yield on U.S. Treasury bonds is 4.6%. This provides investors with a strong incentive to sell yen and buy U.S. dollars. In addition, the Bank of Japan has continued its quantitative easing policy, aggressively purchasing Japanese government bonds, which can also offset efforts to support the yen exchange rate. "The Bank of Japan should tighten financial conditions by allowing the yield on 10-year Japanese government bonds to rise, and then intervention in the yen exchange rate will be more effective, which is currently missing from the policy," he said.

From this perspective, the Bank of Japan has at least taken a new step today.

Japanese government bond yields may rise, benefiting the yen

According to statistics, the Bank of Japan only purchased 4.5 trillion yen worth of government bonds last month, the lowest level since March 2013. Analysts believe that reducing the scale of bond purchases is currently the best way to boost the yen.

It is worth mentioning that this year, Japanese government bonds have become the worst-performing sovereign bond assets in the Asia-Pacific region, mainly because investors are concerned that the Bank of Japan's monetary policy actions have become more unpredictable than those of the Federal Reserve and other major central banks. The Bloomberg Global Return Index shows that Japanese government bond prices have fallen by about 3% so far this year, surpassing Singapore to become the sovereign debt with the largest price drop in the Asia-Pacific region. In contrast, the price returns of Australian and New Zealand government bonds have touched the positive range since the beginning of June, partly because people believe that the policy guidelines of the two countries' central banks have been clear.

Shoki Omori, Chief Strategist at Mizuho Securities in Tokyo, said: "For the Japanese government bond trading market, the difficulty of predicting monetary policy has led to increased volatility, and foreign investors outside the 'Japanese government bond village' may not be able to keep up with the policy pace. Now, it is increasingly unclear whether the Bank of Japan's policy target is prices or other aspects they consider more important." He added that, based on this, although the Bank of Japan ended its multi-year negative interest rate policy in March and announced the end of the Yield Curve Control (YCC) policy, the Japanese bond market generally reacted calmly. However, some foreign investors who did not predict policy changes that month may have suffered significant losses on their Japanese government bond positions.

He further stated that since the end of the negative interest rate in March, the Bank of Japan has been very poor in "expectation management," lacking communication with investors. If the Bank of Japan's policy guidelines continue to lack clarity, making it difficult to reflect prices based on policy expectation changes, then overseas investors who find it hard to predict the Bank of Japan's policy path may avoid Japanese government bonds, and the yields on Japanese government bonds may rise further.

However, as mentioned earlier, according to Brooks's logic, the rise in Japanese government bond yields is beneficial for boosting the weak yen exchange rate. The Bank of Japan's announcement of reducing the scale of bond purchases this time may exert greater upward pressure on the yield curve, which in turn may trigger a continuous rise in the yield on 10-year Japanese government bonds. Although this will hit Japanese government bond investors, this trend is beneficial for the yen.