BoJ: A policy rate near 0.1% still leaves the Yen vulnerable in a low-volatility world – ING

The Bank of Japan (BoJ) has finally ended its eight-year reign of negative interest rates. USD/JPY surged above 150.00 after the decision. Economists at ING analyze Yen’s outlook.

BoJ lift-off underwhelms the Yen 

Gone are the negative interest rates, yield curve control and purchases of ETFs and Real Estate Investment Trusts. Instead, excess reserves at the BoJ will now be remunerated at 0.10% and the BoJ will target the overnight call rate (its main policy rate now) in a range of 0.0%-0.1%. 

The Yen sold off on the headlines that the BoJ would keep an accommodative policy for a while, but recent headlines are suggesting that further rate hikes may be forthcoming now that the virtuous link between wages and prices has been confirmed.

The problem for the Yen, however, is that volatility remains exceptionally low and the carry trade exceptionally popular. USD/JPY may well trade in a 150.00-152.00 range for the time being (locals in Tokyo think the BoJ will not intervene to sell USD/JPY until 155.00), and a lower USD/JPY will have to be led from the Dollar side.