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BoJ pivot imminent: Yen Ready for Takeoff or Tumble?

by Celia

The Bank of Japan (BoJ) is anticipated to conclude its yield curve control scheme, which was initiated in 2016 and involved substantial purchases of government bonds to influence specific rates along the curve. Additionally, expectations suggest the BoJ will cease its purchases of stock exchange-traded funds (ETFs) and other risky assets, a program introduced nearly 15 years ago.

This decision to begin scaling back stimulus measures follows robust salary negotiations between major unions and top businesses in Japan. The outcome yielded significant pay raises for Japanese workers, exceeding 5.2% and marking the highest increase in over three decades. Policymakers have consistently emphasized the importance of robust wage growth in fostering a sustainable upward trajectory in prices driven by domestic demand.

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While the market has largely factored in this anticipated move, traders are keenly observing the guidance provided by the central bank to gauge market sentiment. Should the BoJ indicate a gradual withdrawal of accommodative policies and signal measured future rate hikes, disappointed investors may reduce their long positions, potentially leading to a weakening of the yen. Nonetheless, even under this scenario, the Japanese currency is poised for brighter prospects ahead.

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Conversely, if the BoJ unexpectedly adopts a hawkish stance in its outlook, traders should brace for a bullish response in the yen. This could result in significant declines in currency pairs such as USD/JPY, GBP/JPY, and EUR/JPY. However, the likelihood of this scenario materializing appears slim, with key central bank officials leaning towards a highly gradual normalization process.

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