Lee Hardman, Currency Analyst at MUFG, notes that the yen has strengthened modestly in the Asian trading session following the BoJ’s decision to leave monetary policy unchanged. Key Quotes “Over the last month the trade-weighted yen has stabilized at higher levels after strengthening sharply early this year. It still remains around 2.5% higher since the BoJ announced that it would begin to implement negative rates on the 29th January. Overnight the BoJ announced further operational details for the negative interest rate policy. Firstly, the BoJ announced that each financial institution’s “Macro Add-on Balance” to which a zero interest rate is applied will be reviewed every three months in principle. Secondly, the amount outstanding of money reserve funds (MRFs) entrusted to a trust bank will be added to its Macro-on balance up to the amount entrusted in the previous year. It will widen the exemption of funds from the negative interest rate to include MRFs. Thirdly, in the case where a financial institution increases the amount outstanding of borrowing from the BoJ through the Loan Support Program and the Funds-supplying Operation to Support Financial Institutions in Disaster Areas affected by the Great East Japan Earthquake, twice as much as the amount of the increase will be added to this financial institution’s Macro Add-on Balance. It is intended to incentive and support lending by financial institutions into the real economy by further widening the exemption of funds from the negative interest rate. At the margin, the BoJ’s decision to further widen the exemption of funds from the negative interest rate could imply that they are still preparing to lower rates deeper into negative territory if required. The decision to continue applying a negative interest rate of -0.1% was supported by a 7-2 majority vote. BoJ policy members Kiuchi and Sato maintained their opposition to a negative rate. Mr Kiuchi is concerned that negative rates would impair the functioning of financial markets and financial intermediation as well as the stability of the JGB market. Mr Sato similarly would prefer for an interest rate of 0.1% to apply to current account balances excluding the amount outstanding of the required reserves held by financial institutions at the BoJ. In the accompanying policy statement, the BoJ downgraded their outlook for Japan’s economy signalling a higher likelihood of further monetary easing this year. The BoJ stated that “exports and production have been sluggish mainly due to the effects of the slowdown in emerging economies”. “In this situation, the pick-up in exports has recently paused”. The BoJ remains concerned that inflation expectations have weakened recently as well. As a result the BoJ reiterated that “due attention still needs to be paid to a risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively impacted. If it is judged that additional easing is required the BoJ has reiterated that it is prepared to ease further both in terms of quantity, quality and the interest rate. In the accompanying press conference, Governor Kuroda acknowledged that the BoJ is aware that there are various opinions over the potential effectiveness of negative interest rate policies. However, he emphasized that he will continue to explain the BoJ’s new policy and highlighted the positive impact that interest rates are falling due to their negative rate policy. He remains confident that the impact of their negative rate policy will penetrate the economy and inflation. The BoJ is still monitoring the impact of negative rates which he added could take “some time” although he stated as well that they don’t need to confirm the full impact if they must act again. The comments signal that it may still prove too soon to expect further easing at their next meeting at the end of April when the BoJ updates its economic outlook. The ongoing resilience of the yen is a notable development. The yen has remained at stronger levels over the last month even as global investor risk sentiment has improved, and both yields outside of Japan and the price of crude oil have rebounded. The yen has held up better than we would have expected so far given recent developments in key fundamental drivers. We have run a short-term regression model including yield spreads, equity prices, crude oil, and market volatility which is signalling that key short-term fundamentals drivers are more consistent with USD/JPY trading between 115.00 and 120.00.” For more information, read our latest forex news.