Today, the Bank of Japan has once again confirmed its status as an outsider among global central banks. Despite the global tightening trend, the BOJ has decided to maintain ultra-low interest rates.

No changes on the Japanese front

At the end of the week, traders on the USD/JPY pair are focused on the BOJ meeting. At the start of Friday, the central bank issued its verdict on the further monetary exchange rate.

As expected, the BOJ did not present a hawkish surprise.

The central bank has maintained its policy guidelines: it left interest rates at -0.1% and promised to keep the yield of 10-year bonds at around 0%.

The BOJ continues to follow the dovish route, even despite the next jump in consumer prices. The report published today showed that in October, annual inflation in the country increased at the highest rate since 1989.

This month, the core CPI jumped to 3.4%, which is significantly higher than the BOJ target, which is at 2%. Nevertheless, the BOJ still considers the acceleration of inflation unsustainable.

The central bank expects consumer price growth to slow down to 1.6% over the next 12 months, although it has raised its inflation forecast for the current fiscal year.

According to BOJ estimates, the CPI will remain around 2.9% until March 2023, which is significantly higher than the previous estimate of 2.3%.

Another argument in favor of maintaining a soft monetary policy of the BOJ is the slow recovery of the economy after the COVID-19 pandemic.

Now the central bank is concerned that a total increase in interest rates in the world could trigger a global recession, which would negatively affect the state of the already fragile Japanese economy.

Given this risk, the BOJ sharply lowered its economic growth forecast for the current fiscal year. Now the central bank expects GDP to rise not by 2.4%, as before, but by only 2%, followed by a slowdown to 1.9%.

Such gloomy prospects are the BOJ's main obstacle on the way to normalizing its monetary policy. It forces the BOJ to take a marginal dovish position, which condemns the yen to further depreciation.

What is happening with JPY now?

This year, the yen is experiencing the worst drawdown in almost all directions in history, but most of all against the dollar. Since January, due to the strong monetary divergence of Japan and the United States, the JPY rate has fallen against the USD by more than 20%.

Unlike the BOJ, the Federal Reserve has embarked on a hawkish track this year and has significantly outpaced other central banks in terms of rate hikes.

In order to curb record high inflation in the country, American politicians have already raised interest rates five times during the year and are preparing to hold another round of hikes next week.

Now the markets expect that in November the Fed will again increase the indicator by 75 bps, which is an excellent driver for the dollar, especially when paired with the yen.

However, at the same time, most traders believe that by December, the US central bank may slow down the rate of tightening to 50 bps, as the American economy begins to show signs of slowing down.

The emergence of speculation about the Fed's less hawkish policy caused the greenback to sharply weaken on all fronts this seven-day period, including against the yen.

Recall that last week the dollar reached a new 32-year high relative to the yen, approaching the 152 mark. Since then, the USD/JPY pair has fallen by almost 4%.

In part, the greenback's position was undermined by two cycles of interventions, which Japan is supposed to have conducted in support of the yen. But the main pressure on the dollar was still exerted by increased expectations of a slowdown in the pace of rate hikes in America.

Now that the USD/JPY pair has received another powerful boost from the BOJ, analysts expect it to return to growth.

At the time of preparation of the material, the yen really moved into the red zone and fell against the dollar by 0.35%. According to experts, in the short term, the yen's decline may accelerate significantly.

Memories of last month are still vivid in the minds of many, when the dovish comments of BOJ Chairman Haruhiko Kuroda caused a sharp weakening of the yen. And just half an hour after Kuroda finished his speech, the Japanese Ministry of Finance conducted the first currency intervention in 24 years.

Some analysts do not rule out that in the near future the market may catch deja vu.

If the dollar bulls break loose again, the Japanese government will most likely not hesitate for a long time and press the red button.