Forex Analysis & Reviews: 03.06.2025 - Traders Didn't Believe the...

03.06.2025 11:16 AM

Traders Didn't Believe the Japanese Regulator

The Japanese yen lost some ground against the US dollar after Bank of Japan Governor Kazuo Ueda hinted today that the central bank may continue to slow the pace of government bond purchases in the next fiscal year, as the board approaches a decision on its bond-buying program.

Although this statement triggered a chain reaction in financial markets, leading to a reassessment of Japan's monetary policy outlook, market participants viewed the signal as an indicator of further, albeit gradual, tightening. Investors, who had previously expected the Bank of Japan to maintain its wait-and-see stance, are now forced to factor in the possibility of a faster-than-expected exit from the long-standing quantitative easing program.

This shift in rhetoric from the Bank of Japan is driven by a number of factors, including rising inflationary pressures and a desire for greater financial system stability. Reducing bond purchases is essentially the first step toward monetary policy normalization, which will undoubtedly have implications for global capital flows.

"Many opinions suggested that it would be appropriate to continue reducing bond purchases while maintaining a balance between predictability and flexibility," Ueda said on Tuesday, summarizing views expressed by bond market participants at meetings organized by the Bank of Japan last month.

His comments imply that the BOJ believes the market has generally welcomed further bond purchase reductions after it began quantitative tightening last summer. Later this month, the bank is expected to unveil its bond-buying plan for the fiscal period starting in April next year, although the exact timeframe remains unclear.

Ueda also indicated that the bank will maintain its current bond-buying plan at 400 billion yen (about $2.8 billion), stating that there are only limited calls for its revision.

All of this has led bond traders to closely monitor how the central bank, the largest holder of Japan's government debt, will scale back its bond purchases after more than a decade of massive monetary easing.

Former BOJ board member Makoto Sakurai is among those predicting that the bank will halt bond purchase reductions following the recent surge in yields, which has brought markets to a critical point. Notably, the yield on 30-year Japanese bonds recently hit a record high, signaling an imbalance in the supply-demand dynamic for ultra-long-term bonds. This has attracted more attention to the BOJ's bond-buying decision, which is set to be announced on June 17.

Ueda provided few details about the pace of bond purchases, stating that there is a wide range of opinions on the matter. The central bank currently holds about half of all existing government bonds after more than a decade of unprecedented buying.

Ueda has repeatedly said he wants the market to determine bond yield levels to restore market functioning, especially considering that bond purchases are no longer part of the BOJ's monetary policy tools. "We do not intend to create conditions for future declines in yields by forcibly raising our benchmark rate, even if we cannot expect improvements in the economy and inflation," Ueda said.

It's worth recalling that Ueda recently supported the yen by clearly signaling his intention to continue raising the benchmark interest rate if the economy improves. The BOJ is expected to continue adjusting the degree of monetary easing as needed to ensure it achieves its target for sustainable price stability.

As for the current technical outlook for USD/JPY:

Buyers need to break through the nearest resistance at 143.25 to target 143.75, beyond which a breakout will be quite challenging. The final upside target is seen at 144.20. In case of a decline, bears will attempt to take control at 142.80. A successful break below this level would deal a significant blow to the bulls' positions and drag USD/JPY down toward the 142.30 level, with a further prospect of reaching 141.80.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.