USD/JPY Exchange Rate Surpasses 150 Yen... Will BOJ Adjust Its Policy?

10-Year Government Bond Yield Hits Highest in a Decade
Increased Likelihood of YCC Adjustment
Discussions on Abolishing 0.5% Cap

Following the yen-dollar exchange rate surpassing 150 yen on the 20th, and Japan's 10-year government bond yield approaching 1%, there are speculations that the Bank of Japan (BOJ) may revise its monetary policy. Concerns have arisen that the exchange rate and bond yields could exceed dangerous levels, increasing the likelihood that the BOJ will consider modifying its Yield Curve Control (YCC) policy at this month's monetary policy meeting.

Bank of Japan (BOJ)

On the 23rd, at 9:22 a.m. in the Tokyo foreign exchange market, the dollar-yen rate stood at 149.84 yen per dollar. After hitting 150 yen at 5 p.m. on the 20th, the yen-dollar rate fell back below the 140 yen level two minutes later, fluctuating slightly near the 150 yen mark. The 10-year government bond yield also reached a 10-year high of 0.845% on the 20th. On the 23rd, it recorded an intraday high again at 0.857% early in the session.

Due to the depreciation of the yen and the sharp rise in bond yields, voices within the BOJ are reportedly calling for a revision of the YCC policy. YCC is a policy of unlimited government bond purchases to keep long-term interest rates at a certain level. Previously, the BOJ announced in July that it would maintain the upper limit of bond yields at 0.5%, but would tolerate yield increases up to 1% depending on market movements. The policy states that unlimited bond purchases would begin once yields exceed 1%.

The Nihon Keizai Shimbun reported that within the BOJ, proposals to abolish the 0.5% ceiling on bond yields or to raise the 1% upper limit for bond purchases are being mainly discussed.

In addition to the yen and interest rates, the BOJ is reportedly considering these measures with the possibility that the U.S. Federal Reserve (Fed) may raise interest rates further within the year. The BOJ is concerned that the Fed's rate hikes could widen the interest rate gap between the U.S. and Japan, putting downward pressure on the yen's value. Recently, Fed Chair Jerome Powell indicated that due to high volatility in U.S. inflation, rate hikes could resume in the future.

However, since the Fed has announced it will likely keep rates unchanged next month, the timing for the BOJ's policy revision is expected to be next month. The BOJ previously adjusted its YCC policy in December last year and July when the U.S. slowed the pace of rate hikes.

Some opinions suggest that politically, it may be difficult for the BOJ to revise the YCC. If the government aims to continue quantitative easing to stimulate the economy, allowing long-term interest rates to rise could be interpreted as a signal against the cabinet's intentions.

There is also caution against hastily revising the policy without clear understanding of how much further the U.S. will raise its benchmark rate. The Nihon Keizai Shimbun noted, "Within the BOJ, there are views that the trends in U.S. benchmark rates cannot be reasonably explained," and "some point out that revising the YCC without clarity on U.S. rates could trigger a rise in Japanese government bond yields."