The JPY has moved sharply higher as the BoJ adjusted their bond yield control allowing bonds to be capped at 0.5% up from the previous 0.25% which is the first step to Japan normalizing monetary policy which they need to do with inflation soaring...

Japan's core consumer inflation hit a fresh four-decade high as companies continued to pass on rising costs to households, data showed, a sign price hikes were broadening and could keep the central bank under pressure to whittle down massive stimulus.” (REUTERS)

Months before Tuesday's surprise move to adjust its yield control policy, Bank of Japan (BOJ) policymakers had discussed the potential market impact of a future exit from ultra-low interest rates, minutes of their October meeting showed. The Bank fo Japan said the adjustment of its yield control percentage was NOT a rate hike but it is in all but name.

"Given structural changes such as a shift away from globalization, past experiences in Japan may not necessarily apply. We can't rule out the chance of a big overshoot in inflation," one member was quoted as saying in the October minutes. We have a situation where the BoJ Next year could end up tightening rates as other central banks have reached a peak in rate rises. 

Japanese Overseas Investment Potential Liquidation to Firm the Yen

The Bank of Japan’s ultra-loose monetary policy saw Japanese investors who are the world’s biggest savers send huge amounts of money overseas. According to the Ministry of Finance data, Japanese investors hold 453 trillion yen ($4.08 trillion) of foreign portfolio investments - 282 trillion yen ($2.54 trillion) of bonds and 171 trillion yen ($1.54 trillion) in stocks and funds. On top of that, Japan has $1.3 trillion of foreign exchange reserves, mostly parked in U.S. bonds.

Japan’s net international investment position is worth 64 percent of the country’s annual gross domestic product, This means Japanese investors hold around $3.2 trillion more foreign assets than overseas investors hold in Japan, making Japan the world’s biggest international creditor nation. If just a small proportion of this money flows back to Japan it will have an outsized impact in terms of USD/JPY.

USD/JPY has been driven by yields and with US yields likely to fall going forward and the BoJ likely to tighten we could see far more downside in USD/JPY.

We think the JPY has confirmed a major trend change to the upside and it now is expected to continue to appreciate to correct its deeply oversold condition.

Technical Analysis 

Our view of the key technical levels of support and resistance to look out for on both the monthly and daily charts below.