The Bank Of Japan’s Serious Yen Challenge

Now that the BoJ has “spoken,” let’s notice that USD/JPY is positioned ominously downward, pointing toward a test of its June-August lows at 99.25/54, which if violated, should trigger downside continuation that projects next into the 96-95 target zone.

Such a scenario by definition will strengthen the yen, which will adversely impact the ability of the Japanese economy (and the BoJ) to engineer inflation to help the government meet its 2% inflation target.

In addition, if such a scenario begins to unfold, it will greatly increase the likelihood of BoJ intervention to push the yen lower (lift USD/JPY) and could set up a major confrontation between global speculators who are entrenched in the 15-month downtrend in USD/JPY (yen uptrend) and the BoJ.

Otherwise, also notice that as we speak, 10-year JGB yield is negative 2.7 bps, just beneath The ZERO Rate that BoJ identified Wednesday as the new “cap” on benchmark rates.

The July-Sept. upmove from -30 bps to ZERO has the right look of a major low followed by the initial upmove of a significant recovery rally period in JGB yield.

Here too, similar to the situation that is developing in USD/JPY, the BoJ might be faced with defending the ZERO line-in-the sand along with 100 USD/JPY. The BoJ had better win these battles if the efficacy of the central bank is to remain intact.

USD/JPY (black), 10-Year JGB

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