USD/JPY: the yen is once again in demand thanks to increased yields

How much will Japan's yen appreciate now that the Bank of Japan has relaxed its yield curve controls, in a bullish move for the yen?

One of the main themes affecting markets this year has been the (unwanted) rise in US long-term yields. The rise in US Treasury yields triggered a tightening of financial conditions both in America and abroad.

The European Central Bank (ECB) was the first major central bank to express concern about unwanted tightening, but other central banks, such as the Reserve Bank of Australia, have followed suit. In Japan, rising long-term US yields have triggered a downward trend in the local currency.

Bank of Japan eases pressure on the yield curve

One of the most interesting recent announcements is that the Bank of Japan is willing to let yields rise. Specifically, the bank announced late 2020 that it would widen the band around the zero level so that yields could rise more than before. Higher yields bode well for the currency, which is a positive for the Japanese yen.

Another positive is the policy recently adopted by the Government Pension Investment Fund (GPIF). This month it announced plans to increase the share of foreign bonds and reduce the share of domestic bonds. Bond prices will no longer be supported during downturns, and rising yields will again support the JPY.

The problem is that the financial community views the Japanese yen as a safe haven currency, so it often rises when there are threats to economic stability and systemic risks. Until this perception changes, the yen will struggle to appreciate based on internal fundamentals.

To illustrate this, consider recent developments in the crypto market. Over the past weekend, major crypto-currencies fell by more than 14%, spooking investors in digital assets. The shock was so great that when the currency market opened, safe havens such as the JPY and the CHF were in high demand.

However, this has nothing to do with the internal fundamentals of the yen, and is determined by how market participants perceive the yen in the international context.

In summary, the Bank of Japan is willing to let the yen rise, but it remains to be seen by how much.