The yen is on the verge of significant changes. On December 19, the results of the last meeting of the Bank of Japan this year will be announced. Considering the events leading up to this, there is no doubt that this meeting will trigger strong volatility across all currency pairs involving the Japanese yen. The USD/JPY pair will not be an exception. Moreover, against the backdrop of the dovish pivot of the Federal Reserve, the Japanese regulator may act as a "hawk" for the first time in many years. Such a turn of events will provide strong support to the yen and, accordingly, to USD/JPY sellers.
Recall that the price updated a year-and-a-half low last week, marking 140.98. The pair has been within a downward trend for over a month—since early November, the Japanese currency has strengthened by more than a thousand points. Such price dynamics were primarily due to the tightening rhetoric of Bank of Japan Governor Kazuo Ueda.
As is known, the head of the Bank of Japan voiced a signal of a possible change in the course of monetary policy two weeks ago. Following a meeting with Prime Minister Fumio Kishida, he announced that the central bank is considering various options for target interest rates after exiting negative rates. According to him, the regulator may either maintain the interest rate applied to reserves or return to a policy focused on the overnight rate. Ueda noted that the central bank has not yet decided on the specific interest rate to choose as a target after removing the cost of short-term loans from negative territory. However, he did not specify when exactly the central bank plans to change its course.
After these words, the Japanese currency experienced several weeks of volatility: the markets tried to understand when exactly the regulator would be ready to gradually abandon its policy of negative interest rates, which has been in effect since 2016.
In other words, Ueda's comments triggered a massive rally in the yen, but then the understanding came that the head of the central bank spoke about the upcoming calibration only in a hypothetical context, essentially making a "statement of intent." And although the market reacted to these statements with all seriousness, later, it became clear that the central bank is unlikely to take the first steps at the December meeting (it was against this backdrop that the USD/JPY saw an upward pullback). Reports appeared in the Japanese press (citing unnamed officials from the Bank of Japan) that there is currently no need to end the policy of negative rates "as there is not enough evidence that wage growth will support sustainable inflation."
This turn of events hit the positions of the Japanese currency: the USD/JPY pair moved away from the price low (140.98) and drifted in the region of the 142 figure. Investors are awaiting the verdict of the Bank of Japan to gain additional clarity on the rate forecast.
In my opinion, the Japanese regulator, following the December meeting, will provide support to the yen, even though it will maintain all parameters of monetary policy unchanged. The market, essentially, anticipated events, allowing for revolutionary changes as early as December. Traders, so to speak, jumped to conclusions. However, any hints of an imminent policy change will provide strong support to the Japanese currency— the ultra-loose monetary policy spring has been compressed for too long, and the yen has been awaiting change for too long (two terms of Kuroda's chairmanship). At the same time, there is no doubt that corresponding hints of a hawkish nature will be voiced: the regulator will be preparing the ground for future events in 2024.
According to some experts, the Bank of Japan may take its first practical steps in April of next year when the results of the annual spring negotiations between unions and businesses on wage increases become known. Despite the fact that there are still several months until spring 2024, members of the Japanese regulator will already be laying the groundwork for future changes. This will be reflected primarily in the text of the accompanying statement, the key formulations of which will reflect the hawkish intentions of the central bank. This will be enough for the yen to demonstrate a rally across the market, including against the dollar.
Therefore, today's corrective pullback in USD/JPY should be approached with great caution. If the Bank of Japan indeed tightens its rhetoric, sellers will once again take the initiative. In this case, the final stop will not be the current local low of 140.98 but the support level of 139.60, corresponding to the upper line of the Bollinger Bands indicator on the W1 timeframe.
