Bank of Japan defies market speculation; keeps policy steady

TOKYO, Jan 18 ( - In keeping its key rate and yield curve control policy unchanged at Wednesday's meeting, the Bank of Japan probably wanted to convey a message to the market; don't fight the BoJ.

The BoJ’s decision to leave its policy tools unchanged clearly disappointed an FX market positioned for further adjustment. Arguably the market had got ahead of itself, where the recent run-up in two-year yen swap rates to 0.30% suggested that a rate hike might even be on the table in the not-too-distant future. These swap rates have now dropped back to 0.15%, taking the yen with them.

USD/JPY remains priced as one of the most volatile currencies in the G10 FX space and notably delivers on those expectations of volatility. One week realised volatility is being delivered at 20% versus the priced levels of 19%. We expect that volatility to continue, especially in the March/April window when Governor Kuroda will hand over the reins of the BoJ governing board.

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