The yen surged to a four-month high against the dollar on Tuesday after the Bank of Japan surprised markets by deciding to review bond yield control policies and widen the trading band for 10-year government bond yields.
While it kept the broad policy setting unchanged – pegging the short-term JGB yield at -0.1% and the 10-year yield around zero, the BOJ decided to let the longer-term yield move 50 basis points to the 0% target. Higher than the previous band of 25 basis points.
The US dollar last traded 3.5% weaker at 132.35 yen. It hit a low of 132 yen, a level last seen in mid-August.
Most BOJ watchers expect no change until the end of governor Haruhiko Kuroda's 10-year term at the end of March.
According to Bart Wakabayashi, branch manager at State Street in Tokyo, "We see them starting to test the market on exit strategies". He added regarding dollar and yen trading, "we can see a break below 130".
The 10-year JGB yield jumped to 0.46% from the previous limit of 0.25%. It attracts U.S. Treasury yields. the equivalent is also higher, with the 10-year surging to this month's high of 3.711%.
The US dollar index edged lower, falling 0.6% to 103.99, in its trading range this month of 103.44 to 105.90. The index measures the U.S. currency. against the yen and five other major currencies, including the euro and sterling.
The index had moved toward the top of the range ahead of the BOJ's announcement as investors continued to evaluate the Federal Reserve's message of higher interest rates for longer.
The yen's strengthening was seen across the board with the euro down 3.3% to its lowest since late September at 140.17 yen and sterling also down about 3.4% to its lowest since October 12 at 160.34 yen.
Against the US dollar, the Euro strengthened 0.2% at $1.0628 and sterling strengthened 0.07% higher to $1.2154. The Aussie slipped more than 3.6% to 88.34 yen, a seven-month trough, and the New Zealand kiwi fell 3.8% to 83.82 yen, a two-month low, respectively.
According to Kuroda, he stated that the change does not mean an increase in interest rates but to improve the functioning of the bond market. He reiterated that it was too early to discuss an exit strategy from the existing stimulus.
