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The yen surged to a four-month peak against the dollar on Tuesday after the Bank of Japan stunned markets by deciding to review its yield curve control policy and widen the trading band for the 10-year government bond yield.
While it kept broad policy settings unchanged - pinning short-term JGB yields at -0.1% and the 10-year yield around zero - the BOJ decided to let long-term yields to move 50 basis points either side of its 0% target, wider than the 25 basis point band previously.
The dollar last traded 3.5% weaker at 132.35 yen. It hit a low of 132 yen, a level last seen in mid-August, reported Reuters.
Most BOJ watchers had expected no changes until the current governor Haruhiko Kuroda’s 10-year term ends at the end of March. “This was really out of the box,” said Bart Wakabayashi, branch manager at State Street in Tokyo.
“We’re seeing them start to test the market about the exit strategy,” he added. For dollar-yen, “we could see a break below 130. It’s very much within reach this year.”The 10-year JGB yield jumped to 0.46% from the previous cap at 0.25%. It pulled equivalent U.S. Treasury yields higher as well, with the 10-year soaring to the highest this month at 3.711%.
