USD/JPY: Yen reverses course on hints of possible BOJ policy tweak

The Japanese yen firmed 0.37% against the dollar (USD/JPY) on Tuesday to 147.80, reversing earlier losses. The shift came after hints from the Bank of Japan that it may tweak policy settings at its next meeting in March, despite leaving ultra-easy monetary policy unchanged for now.

BOJ Governor Kazuo Ueda noted many firms have already decided on wage increases and unions are pushing for more pay rises ahead of annual wage negotiations. This could allow the central bank to assess normalising policy before negotiations conclude.

The relentless yen weakness has boosted the profitability of yen-funded carry trades. With risk appetite strong amid soaring Japanese stocks, and currency volatility falling after initial policy speculation, carry trade conditions increasingly favour further yen depreciation.

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This raises the prospect of currency intervention to stem losses. The yen has plunged even against weak counterparts like the Indian rupee and Turkish lira.

With no policy changes in January, pressure for intervention may now intensify. The yen is the optimal funding currency for yield plays thanks to Japan’s lone negative interest rate. Its continuous fall has magnified returns for short positions.