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USD/JPY surges to one-month high, as BOJ approves negative rate policy

Published 01/29/2016, 05:46 PM
Updated 01/29/2016, 05:53 PM
USD/JPY soared as much as 2.1% on Friday to close above 121.10 per dollar

Investing.com -- USD/JPY surged as much as 2.1% before paring early gains late in the U.S. afternoon session, as the Bank of Japan jolted global markets by approving a negative interest rate policy for the first time in its history.

The currency pair traded in a broad range between 118.53 and 121.68, before closing at ¥121.12 per dollar, up 2.31 or 1.95% on the session. At Friday's highs, the dollar reached its strongest level against the yen since December 18, when it soared above 123.50. The dollar has closed higher against the yen in each of the last four sessions and six of the last seven. With Friday's sharp gains, the dollar is on pace to close the month slightly higher versus the yen by approximately 0.75%.

USD/JPY likely gained support at 116.45, the low from January 21 and was met with resistance at 123.69, the high from Nov. 18.

On Friday, the Bank of Japan lowered its rate charged to commercial banks that park excess reserves at the central bank to negative 0.1% in a somewhat shocking moved aimed at helping its economy stave off threats of deflation. By pushing rates into negative territory, the BOJ is in effect penalizing commercial banks for not lending aggressively by charging the institutions for holding excessive reserves at the central bank. After the unexpected decision, two of the top three central banks in the world are now offering rates in negative territory for the first time ever. The BOJ's unprecedented move follows a similar policy implemented by the European Central Bank in 2014.

Many economists view the move as a desperate attempt by the BOJ to bolster persistently sluggish inflation. While Japan's annual Core CPI rose modestly by 0.1% in November, it marked the first time the figure increased in five months. Japanese Core CPI, which strips out fresh food prices, remains significantly below the BOJ's price target.

The BOJ is currently pumping ¥80 trillion into the Japanese economy ($674 million) through a large-scale quantitative easing program that has achieved varying amounts of success over the last three years. In explaining his decision, Bank of Japan governor Haruhiko Kuroda cited increased risks related to the Chinese and Emerging Markets slowdown, as well as widespread volatility in global financial markets at the start of the year. Kuroda indicated that the BOJ will extend the negative rate policy "as long as necessary."

As a result of the Bank of Japan's surprising announcement, yields on both the Japan 2-Year and the Japan 5-Year plunged to their lowest level on record. Yields fell into negative territory for Japanese government bonds with a duration of three months through eight years.

In the U.S., bond prices moved to the upside as yields on 10-Year Treasuries tumbled 5.4 basis points to 1.931%, their lowest closing level in nine months.

The dovish stance from the Japanese Central Bank could persuade the Federal Reserve to delay further tightening measures, as other top global economies continue to show signs of weakness. On Wednesday, the Federal Open Market Committee (FOMC) left its benchmark Federal Funds Rate unchanged between 0.25 and 0.50%.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, soared more than 1% to an intraday high of 99.88. The dollar remains near a 12-month high from December, when the index eclipsed 100.00.

EUR/USD settled at 1.0893, down 0.98% on the session, while USD/CAD lost 0.40% to settle at 1.3973.

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