In a follow-up on yesterday's article, "I am ambivalent about negative rates", it is apt to now look into the effect of the BoJ's recent dip of the toe to highlight how precarious a mechanism that Central Banks have taken as a last resort. Markets were blindsided on Jan 29th earlier this year by the BoJ when they ensued a radical plan, already deemed a failure by financial markets at the time, given the lack of options Tokyo had to spur growth in a volcanic global market. They moved out of the trenches and further exposed themselves in line of fire amongst the currency wars and adopted negative interest rates for the first time, buckling under immense pressure to revive growth in the world's third-largest economy. USD/JPY price action since BoJ's surprise measures The move initially drove down the Yen in a continuation to what had already started to be priced in. Markets are forward looking and while the surprise decision to start charging banks 0.1% for parking additional reserves with the BOJ to encourage banks to lend and prompt businesses and savers to spend and invest was not foreseen so soon, there was an air of bearishness in the Yen and the markets were already covering long Yen from 116.00/118.00. We were suddenly back to the 200 dma and trading on the 121 handle on the knee-jerk. The impact of such a move and general monetary easing is not too dissimilar from outright currency intervention. In this day and age, no Central Bank is bigger than the market. Hence, while such a surprise act from out of the blue will have markets in a panic, as the dust settles and markets adjust, the impact starts to wane. USD/JPY immediately reversed and has not looked back since, having gained 11 percent since the Bank of Japan joined the party of negative rates in a technical rally. No FX player wanted to get in the way of that train when it got going below 116.00, making a low of 110.97 before a period of consolidation between there and 114.86, then back to 110.67 and more supply to a current low of 107.62. But why did a run on the Yen suddenly take shape in the first place? Just as I explained yesterday, under the heading, "Adverse consequences of negative rates" ... "At the same time, there could also be some adverse consequences for financial stability and that is also what makes a market in FX," the negative interest rates in Japan have indeed given rise to unintended negative consequences for the BoJ and Tokyo. Japanese stocks have shed some 13 percent since January, with banks the hardest hit. Quite evidently from the moment the BoJ were seen scrambling for unprecedented measures, out of desperation, markets had lost all confidence with the belief that the Bank of Japan is just a rabbit between the headlights. Whether its huge purchases of stocks, bonds or negative rates, non are having the intended effect. Foreigners have sold a net $46 billion in Japanese stocks since January. The carry-trade in the Yen used to fund the purchase of those stocks was basically unwound; Sell the stocks and the market also buys the yen. USD/JPY: So where next? Well, with Tokyo spent out, it is probably time to look back into the greenback. Coupled with a less aggressive stance in Washington from the Federal Reserve, ironically since the last G20 meeting, technically, for the very near-term, the psychological 105 handle is compelling where the weekly 200 sma converges at 104.78. For more information, read our latest forex news.