Yen strengthens on scepticism about BOJ’s new framework

The yen rebounded on Wednesday, with investors skeptical about whether the Bank of Japan’s latest measures will be enough to generate inflation and many also cautious about the dollar before the Federal Reserve policy announcement.

Japan’s central bank has overhauled its massive stimulus program, scrapping its focus on monetary base and setting targets for long-term rates. It also committed to overshooting its elusive 2 percent inflation target.

The BOJ maintained the 0.1 percent negative interest rate for some of the excess reserves that financial institutions park with the central bank. But it abandoned its base money target and instead set a “yield curve control,” under which it will buy long-term government bonds to keep 10-year bond yields around their current zero percent.

The BOJ’s measures boosted global risk sentiment and banking stocks and initially put pressure on the safe-haven yen, which tends to do well when financial markets comes under stress [.EU]. But the yen bounced back to trade higher against the dollar and the euro in the European session.

“The announcements likely won’t eradicate the scepticism in the market over the BOJ’s ability to achieve its inflation goal through additional easing,” said Derek Halpenny, European head of market research at Bank of Tokyo Mitsubishi.

“The strengthening of the inflation goal by now seeking an overshoot is all well and good, but if there is deep doubt over reaching even 2 percent, there will be even greater doubt over achieving an overshoot. So there is nothing in today’s announcement to make us turn suddenly yen bearish.

The dollar, which had risen more than 1 percent to a one-week high of 102.79 yen JPY=, fell to 101.40 yen, down 0.3 percent on the day. BOJ Governor Haruhiko Kuroda’s upbeat comments on the economy also helped the yen.

The euro, which had surged to 114.36 yen EURJPY=, was trading at 113 yen, down 0.35 percent on the day.

Traders said the BOJ’s move to boost inflation surprised those who doubted that the central bank had much left in its arsenal. The BOJ’s announcements initially saw the yen weaken in Asian trade before it regained ground in Europe.

Investor attention will now shift to the Fed. The U.S. central bank is expected to leave interest rates unchanged at 0.25 percent to 0.50 percent and could hint at a rate increase by the end of the year.

Nevertheless, weaker-than-expected U.S. economic data and subdued inflation and wage growth have prompted investors to call off bets for a Fed rate hike on Wednesday.

On Tuesday, data showed housing starts fell more than expected in August as building activity declined after rising for two straight months.

“In the absence of a rise in U.S. inflation expectations it is difficult to expect the dollar to gain much upside traction,” Rabobank analysts said in a note. “This in turn limits the downside for currencies such as the yen and the euro. We continue to view the 100-105 range as likely to contain dollar/yen in the months ahead.”