The yen got slammed after Bank of Japan stood pat. Here’s what’s next.

The U.S. dollar soared 1.4% to fetch 144.79 yen
USDJPY,
+0.98%.
The yen had been on a tear in December — with the dollar retreating from a nearly 40-year high, set in November. The dollar remains down around 2.3% for the month but has surged more than 10% versus its Japanese counterpart in 2023.

Traders appeared to pile into long yen positions, or abandon previous shorts, after remarks by Ueda and another BOJ official earlier this month were taken as a signal that an end to negative rates was imminent.

Traders may have been particularly disappointed by Ueda’s remarks pouring cold water on the idea the BOJ would feel compelled to deliver a rate hike before the U.S. Federal Reserve begins cutting interest rates, Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, said in a note.

Instead, Ueda said it would be “inappropriate to think that we will rush to change our policy because the Fed is likely to move within the next three to six months.” Most BOJ policy makers think they will need to “observe the situation for a little longer,” he said.

Guha said the outcome reinforced Evercore’s expectation that the BOJ intends to “methodically” prepare the ground for a first hike to exit negative rates in April rather than deliver a surprise increase in coming months.

Indeed, skeptics had argued the BOJ was unlikely to rush the move, arguing that a third-quarter contraction in gross domestic product and a fall in inflation would keep policy makers on hold.

The BOJ’s reticence doesn’t mean the yen bounce is over, strategists said, with dip buyers likely to step in on expectations for rate cuts by the Federal Reserve and potentially other major central banks as the BOJ remains on course to eventually tighten policy.

Analysts said falling U.S. yields by themselves are likely to keep pressure on the dollar.

“The yen’s knee-jerk reaction isn’t surprising but probably doesn’t represent a significant change of direction,” said Kit Juckes, global macro strategist at Société Générale.

Attention is likely to turn to annual wage negotiations between Japan’s enterprise unions and big employers. Upward wage pressure could provide the justification for a rate move, observers said.

“The BOJ is likely to exit its negative rate policy in Q2 next year, using the spring wage negotiations as a pretext, even though policy tightening probably won’t be warranted by the economic and inflation data by then,” Duncan Wrigley, chief China-plus economist at Pantheon Macroeconomics, said in a note.

The BOJ had implemented yield-curve control, or YCC, in 2016, a policy that aims to keep government bond yields low while ensuring an upward-sloping yield curve. Under YCC, the BOJ buys whatever amount of JGBs is necessary to ensure the 10-year yield remains below its cap.

The Bank of Japan in October effectively abandoned its policy of keeping the yield on the 10-year Japanese government bond
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below 1%, saying the threshold would now serve as a “reference” point.

YCC was one of many extraordinary measures employed by the Bank of Japan in recent decades to battle deflationary prices.

The BOJ sent shock waves through global markets in July when it loosened the cap, lifting it to 1% from 0.5%.

Changes to YCC have prompted or amplified selloffs in U.S. Treasurys and other government bonds, adding volatility to stocks and other assets. That’s because the prospect of higher yields in Japan could prompt the nation’s investors to repatriate money parked in assets overseas.

The yield on the 10-year JGB fell more than 2 basis points to 0.52%. That kept pressure on U.S. yields, with the rate on the 10-year U.S. Treasury
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down 2.8 basis points at 3.911%. Yields and debt prices move opposite each other.