Today's announcement from the Bank of Japan was somewhat more hawkish than the previous policy. However, it harmed the yen's exchange rate.

The Japanese yen weakened again in Tuesday's session (October 31). This is because market participants are not too amused by the policy announcement from the Bank of Japan. As a result, USD/JPY was observed to surge from around 149.00 to nearly 151.20 in just a few hours. EUR/JPY even briefly set a new record high in the last fifteen years.

USD/JPY

The Bank of Japan (BoJ) has decided to make some adjustments to its yield curve control (YCC) policy. BoJ is maintaining its target yield for the 10-year Japanese Government Bonds (JGB) in the range of 0%, with an upper limit at +1.0% and a lower limit at -1.0%, but it has changed the upper limit of 1.0% to be a "reference" only. 

This means that yields can exceed the 1.0% threshold, as BoJ will no longer strictly target the yield. BoJ has also removed the statement about efforts to maintain the target yield through unlimited bond purchases.

These changes are slightly more hawkish compared to BoJ's previous policy. However, these changes are still far more dovish than market expectations.

One of the main sources of disappointment is that the Bank of Japan is keeping the interest rate at -0.1% without signaling any increase at all. Meanwhile, Japanese inflation rates have been above the 2% target for over a year. This raises questions about whether BoJ will eventually normalize interest rates or leave negative interest rates in place for a longer period.

"This move disappointed investors, lifting USD-JPY back above 150. This reaction made even clearer that for a trend reversal of the current USD-JPY strength, not only the Fed kicking off an easing cycle but also the BoJ starting policy normalization is needed," says Roberto Mialich, FX Strategist at UniCredit.

Michael Pfister, an FX analyst at Commerzbank, suggested that the day's decision has raised questions regarding the Bank of Japan's contemplation of an exit strategy from its ultra-expansive monetary policy shortly.

He noted that it wouldn't be unexpected if the market perceives this as a more dovish action and consequently puts pressure on the yen. Additionally, Pfister mentioned that unless there are indications of intervention from the Japanese Ministry of Finance, USD/JPY is expected to maintain its upward trajectory in the weeks ahead.