Japan’s yen slides as BOJ fails to move toward normalization

The Japanese yen was one of the worst performers among the U.S. dollar’s main rivals on Tuesday, trading lower after the Bank of Japan surprised markets by keeping its monetary policy ultra loose.

During Asia trading hours, the Bank of Japan gave its policy update in which it refrained from changed its yield curve control policy, which had been hoped for by investors. and would likely have been seen as a first step down the path of normalization.

BOJ Gov. Haruhiko Kuroda said that he and his policy makers would “likely have to continue monetary easing longer than expected, and we wanted to secure credibility for doing that by showing forward guidance.” The BOJ had not provided forward guidance under Kuroda’s leadership before.

“It seems the BOJ will be the last major central bank to pull the trigger on tightening policy as the Japanese economy continues to struggle with stubbornly low inflation levels,” wrote Hussein Sayed, chief market strategist at FXTM. The BOJ’s target is 2%, but likely won’t be reached before 2021, according to the central bank.

“This should allow further widening in spread between Japan’s bonds and other global bonds toward year-end, suggesting that the yen is likely to remain under pressure for the near future,” Sayed said.

The Japanese yen USDJPY, +0.74%  sold off in response, with one dollar last fetching ¥111.90, up from ¥111.06 late Monday in New York and at a 1.5-week high. Versus the euro EURJPY, +0.75% the yen also slipped, and one euro bought ¥130.96, up 0.8%.

Over the month of July, the yen slipped 1.1% versus the dollar, and 1.2% against the euro, according to FactSet.

Central banking attention will now turn to the U.S., where the Federal Reserve will begin a two-day meeting on Tuesday. No changes in policy, while Fed funds futures show traders see an 88.7% chance of a 25 basis point rate increase when policy makers meet in September. The Bank of England follows suit with its policy update on Thursday.

The ICE U.S. Dollar Index DXY, +0.09%  rose 0.2% to 94.483 on Tuesday, advancing after various economic data reports earlier, including better-than-expected consumer confidence. For the month of July, the dollar gauge is on track for a 0.2% drop, it’s first monthly loss since March.

Elsewhere, eurozone second quarter GDP came in at an annualized 2.1%, compared with the FactSet consensus forecast of 2.2%, while harmonized inflation across the EU rose to 2.1% in July, versus 2% expected.

The mixed but broadly positive bag of data allowed the euro EURUSD, -0.0085%  to trend higher earlier, but the strengthening dollar kept the shared currency little changed at $1.1701. The euro is up 0.3% in July.

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