Bank of Japan Changes Bond-Buying Policy and Its Effect on the Yen

June 29, 2021, | AtoZ MarketsBank of Japan decided to conduct the outright purchases of Japanese government securities effective from July 1, 2021 using a quarterly schedule of outright purchases of government bonds at the end of March, June, September, and December.

Depending on market conditions, the Bank may set the purchase size per auction to a fixed amount or to an unlimited amount. The conduct of fixed-rate purchase operations for consecutive days will be announced as needed before conducting these operations.

The Bank will release the information regarding bonds to be purchased, schedule of the purchases, purchase size per auction and the fixed-rate applied in the auctions on its website.

What Will This Process Look Like?

The Central bank will makes outright purchases to be purchased JGBs with coupons of 2-year bonds, 5-year bonds, 10-year bonds, 20-year bonds, 30-year bonds, 40-year bonds, floating-rate bonds, and inflation-indexed bonds.

Purchasing yields will be set per auction, by indicating the yield spreads from the benchmark yields which the Bank determines separately.

Regarding purchases of T-Bills, conducted as part of money market operations, the Bank will decide the purchase size per auction considering the effects on financial markets.

Why Was This Decision Made?

The entity explained that it had to make this decision because  “Were concerns about maintaining the functioning and liquidity of the market in the medium to long term, as investors and securities companies were exiting from the bond market or reducing their operations due to a decline in transactions “.

In the first quarter of 2021, long-term interest rates temporarily rose to a level exceeding 0.15 percent due to heightened uncertainties about an expansion in the range of fluctuations in long-term interest rates, particularly in reference of the United States.

“There had only been a small number of inter-dealer transactions for a broad range of maturities throughout the month of May, resulting in a further deterioration in market liquidity”, noted the central bank.

What Effect Does This Have on the Yen?

In the short term, Japan has to deal with the economic challenges imposed on it by the covid-19 pandemic. On the other hand, in the long term, the country must deal with issues such as deflation, debt and the problems of its aged population.

USD/JPY started this year at 103.08 and after reaching a low of 102.58, the price has been steadily rising. Last April, the price stopped its ascent in the 107.47 zone, from where it continued to grow in the price chart, and is currently trading around the 110.50.

If we check the Fibonacci extension, we can see that the price could reach the 112.64 area. However, in order to achieve this, it must first successfully overcome the 111.70 zone.

What Does Our Monthly Chart Say?

If we review our monthly chart we can see that the JPY faces great challenges against the dollar.

If the price should hold above 108.97, the chances of further growth are better. On the contrast, if the price drops below this zone, the next important support appears at 103.78.

For Japan, the next important event will be the holding of the Olympic games in July and August, however they will be a challenge in the face of the rebound of the covid.

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