USD/JPY Tests 130.00 as New BoJ Governor Rumors Swirl

USD/JPY Tests 130.00 as New BoJ Governor Rumors Swirls
USD/JPY Tests 130.00 as New BoJ Governor Rumors Swirl
In the midst of a global economic slowdown and heightened inflation concerns, the Bank of Japan surprised markets by maintaining its ultra-low interest rates on Wednesday and defending a yield curve control policy that has jolted investors. The surprise decision to keep intact its YCC cap sent the yen skidding against most currencies and yields tumbling the most in decades, sending investors fleeing Japanese assets on expectations that the central bank would overhaul its ultra-loose policy.

Kuroda’s Term Ends on April 8
After nearly four years at the helm, Japanese central bank chief Haruhiko Kuroda is set to step down from his post after his term ends in April. His successor, Kazuo Ueda, is reportedly slated to be appointed as the next Bank of Japan (BoJ) governor.

The BoJ is widely expected to continue its ultra-loose monetary policy until the new governor takes office, likely in April when Kuroda’s term expires. Traders expect that the incoming governor will make only small changes to the Bank of Japan’s ultra-loose policy stance, and that the BoJ will stick with its YCC cap.

It will be up to the incoming BoJ Governor to steer the BoJ away from decades of ultra-low interest rates and steer an orderly exit. It will be difficult for any new BoJ Governor to do so without a serious rethink of the Bank of Japan’s ultra-loose monetary policy stance.

With the ECB continuing its hawkish stance, there is a strong possibility that the Euro will break higher over the coming months, with a further 50 basis point hike to the ECB’s key rate forecasted from here onwards. The ECB’s hawkish outlook for Europe is currently a bit stretched, so it will be interesting to see what direction the currency trades after tomorrow’s preliminary January PMIs.

EURUSD is now bouncing back after Friday’s strong risk sentiment bounce and the ECB’s latest hawkish speech. The ECB’s Klaas Knot has been calling for multiple 50 basis point hikes from here onwards, with a peak rate for July at just south of 3.50%.

The yen has been weak for some time and the BoJ’s YCC cap is still the primary weapon in the Bank of Japan’s arsenal to control long-term bond yields, so the market will be paying close attention to this key policy. It is worth noting that the YCC cap has already been under attack in recent days, and it could be tested again, especially if speculators test the BoJ’s resolve to defend this important market operation tool.

Inflation is accelerating and wage growth is rising rapidly in Japan. These factors are weighing on the economy, which is seen expanding above potential in the current fiscal year.

Core consumer prices in Japan are now running well above the Bank of Japan’s 2% target for eight straight months. Inflation is a key factor in determining the future of Japanese policymakers, who will need to be careful to not trigger an overheating of the economy by hiking rates too quickly. The BOJ’s quarterly report also raised its core consumer price inflation forecast for the current fiscal year to 3.0%, up from 2.9% projected in October.