• USD/JPY has settled in the 114.50 area, roughly flat on the day despite a dovish BoJ and higher US yields.
• Safe-haven demand has underpinned the yen on a day where Fed tightening fears have driven US equities lower.

USD/JPY has eased back to near the 114.50 mark in recent trade after briefly spiking as high as the 115.00 handle during Asia Pacific trade on post-BoJ rate decision yen weakness. The more dovish than expected BoJ aside, some FX traders will be surprised at USD/JPY’s inability to track the latest advances in US bond yields that saw the US 10-year on Tuesday hit its highest level since January 2020 above 1.85%. By contrast, at current levels just above 114.50, USD/JPY is still trading some 1.5% below the 116.35 multi-year highs it hit in the first week of 2022.

USD/JPY’s failure on Tuesday to hold to the north of the 115.00 level, or indeed above the 21-day moving average at 114.91, post-BoJ/US bond yield spike likely has a lot to do with the market’s risk-off tone. US equities have tumbled on Tuesday as a result of Fed tightening fears and FX markets have unsurprisingly adopted a fairly defensive posture, which has seen safe-haven currencies JPY and USD outperform in unison. A much weaker than expected NY Fed manufacturing survey did not shift the dial for FX markets.

Recapping Tuesday’s BoJ meeting; as expected, the bank didn’t announce any new policy changes, but did modestly upgrade its inflation and growth forecasts, as sources had recently hinted was likely. The inflation forecast for the fiscal years 2022/23 and 2023/24 were both lifted to 1.1% from previously 0.9% and 1.0%, while the language on the risks to prices was adjusted to “generally balanced” from “skewed to the downside.

Governor Haruhiko Kuroda acknowledged that price pressures had risen, but was eager to push back against any chatter about rate hikes. “We are not debating an interest rate hike” he said in the post-meeting press conference, adding that “the median forecast of board members is for inflation to move around 1%… Under such conditions, we are absolutely not thinking about raising rates or modifying our easy monetary policy”. “We continue to expect the BoJ to stick to their current policy framework until at least Governor Kuroda’s term ends next April,” said an analyst at MUFG, adding that “the widening divergence between BoJ and Fed policy expectations should continue to place upward pressure on USD/JPY”.