Yen holds gains, markets rebound after Bank of Japan move

The yen appreciated on Wednesday and stock markets rebounded from a previous day’s tumble, fueled by the Bank of Japan’s shock decision to move away from ultra-loose monetary policy.

The move to allow certain government bond yields to fluctuate in a broader range was seen as a harbinger of a possible rate hike next year, which would finally bring the central bank in line with others around the world.

Tuesday’s announcement sent the yen climbing to just over 130 from over 137 to the dollar – its strongest reading since August – while also gaining against other peers, including the euro. And he managed to keep most of the advances on Wednesday.

Regional markets mostly recovered from a painful sell-off, although fears that borrowing costs around the world will continue to rise over the next year kept any rally in check.

Tokyo was slightly lower again after falling more than 2 percent on Tuesday, although Hong Kong, Shanghai, Sydney, Seoul, Wellington, Taipei, Manila and Jakarta were all up.

The surprise move came as investors were already suffering from rate hikes by the US Federal Reserve and European Central Bank last week and warnings from officials that rates were likely to rise higher than originally expected.

The tightening measures, aimed at bringing decades of inflation under control, have fueled speculation that the global economy will slide into recession.

“Tighter BOJ policy would remove one of the last global anchors that has helped keep borrowing costs low across the board,” analysts at Deutsche Bank said.

And National Australia Bank’s Ray Attrill added that “Tuesday’s tweak, whatever the BOJ (and the government) wants us to believe, has been interpreted as sending the scriptures to the wall presses.

“It is also seen as a sign of a formal end to tolerance/desirability of yen weakness.”

Traders are also keeping an eye on China as it quickly reopens after nearly three years of a zero-COVID policy of lockdowns and mass testing that have hit the world’s second largest economy.

But there is concern about the immediate impact of a surge in infections as hospitals struggle, pharmacy shelves are emptied and crematoria overcrowded.

“Although unspoken, it is understandable that policymakers have decided to embrace a sizeable COVID wave,” said Stephen Innes of SPI Asset Management.

“And beyond the COVID shift, Chinese policymakers have taken more decisive steps to support the economy as broader macro politics continues to ease.

“The tradeoff is to expect weaker oil demand from the COVID phase-out wave across the country, but potentially a above-consensus pick-up in demand in 2023 due to the accelerated pace of reopening.”

Still, the expected surge in demand from China has helped push crude oil prices higher. A fall in US inventories also provided support, while the approaching northern hemisphere winter is expected to further boost energy consumption.

© 2022 AFP

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