BOJ policy had catastrophic consequences for yen, and it may get worse
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Oct 22 (Reuters) -In 1995, before the Bank of Japan moved to an accommodative stance and subsequently cut interest rates to zero, the trade-weighted value of the yen was 150.76. This year the yen's trade-weighted value sank to a record low at 53.06. The bounce to 57.38 since July is immaterial compared the prior slump.
Although policies undermining the yen are changing slightly, they remain easier now than they were at the start of the easing cycle. The central bank intends to reduce bond purchases but not halt them, and the plan is to keep buying in 2026, perhaps longer.
Japan's interest rate is expected to rise but only to around 0.6% by the end of next year, when it may no longer be the lowest rate globally but it will certainly be one of them.
The rally following intervention, and small changes in policy in July did have a big effect though; it drove traders from bets on yen dropping to wagers that it rises, and it seriously damaged yen funded carry trades.
As a result, there is far less restraint on a drop that is supported by both technicals and fundamentals. There is no speculation for the central bank to counter - which means intervention will be less effective. Unencumbered by big short positions, the yen could drop more quickly than when traders were expecting it to do so.
For more click on FXBUZ
(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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