(Bloomberg) -- The yen rose to its highest level in nearly three weeks on reports that the Bank of Japan may raise a cap on government bond yields as the central bank convenes for its policy meeting.
Policymakers are considering letting the yield on 10-year government bonds rise above 1%, Nikkei reported Monday, without identifying where it obtained the information. The yen, which had traded lower on the session prior to the news, immediately jumped roughly half a percent, before pushing to approximately 148.81 per dollar, its strongest intraday level since Oct. 11.
The sharp appreciation in the yen comes as BOJ Governor Kazuo Ueda faces a delicate balance at the meeting, which concludes Tuesday. If the central bank maintains its current policy of managing bond yields, known as yield curve control, the yen could face renewed selling from speculators. But major changes could invite further upwards pressure on yields, even beyond where policymakers are comfortable, and jeopardize the goal of achieving stable inflation.
“The decision tomorrow will likely be ‘policy revision' or ‘policy tweak' at max, and unlikely a policy normalization,” said Yusuke Miyairi, currency strategist at Nomura International Plc. “In this case, we think the USD/JPY will fall initially after the announcement, but could eventually rise towards 150 in a few days of time.”
Read more: BOJ May Indeed Provide This Week's Biggest Markets Threat
What Bloomberg Intelligence Says...
“We expect the Bank of Japan to hold its yield-curve control at its Oct. 30-31 meeting. Rising JGB yields have put the 10-year ceiling within striking distance. A tweak could relieve pressure on the framework — temporarily.
— Taro Kimura, Economist
Click here to read the full report
In July, similar speculation on the demise of yield curve control also sparked a sudden rally in the yen. More recently, the currency has been under pressure, weakening toward approximate levels where Japan intervened last fall.
Read more: Why Tweaks to Japan Yield Curve Controls Rock Markets
“If they do nothing the yen will weaken, but if they do something, it will strengthen,” said Kit Juckes, chief foreign-exchange strategist at Societe Generale in London. “However, it can strengthen more on a policy move than it can weaken on inaction.”
(Adds strategist comment, updates prices, adds context on BOJ decision)
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