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The yen finished in one of the top spots last week. Will the BOJ give it another push this week?

Japan’s data dump (July 30, Asian session)

A bit later today we’ll see Japan’s retail sales, unemployment rate, and preliminary industrial production numbers.

While these reports don’t tend to dictate the yen’s intraday price action for long, significant upside or downside surprises could amplify or weaken trends that the yen is trading on.

BOJ’s policy statement (July 31, Asian session)

The Bank of Japan (BOJ) will be one of the major central banks sharing monetary policy decisions this week. Heck, the BOJ’s event might even cause the biggest volatility!

See, market geeks have been speculating for weeks that Governor Kuroda and his team are ready to tweak their policies to a “more sustainable” pace in its long-term battle against inflation. Speculations include changes in the BOJ’s interest rates, the pace of its bond-buying program, and even the type of assets that it’s planning to buy.

Kuroda has denied knowledge of such discussions and his team had been more aggressive than usual in keeping 10-year JGB yields low, but those aren’t stopping speculators from expecting some changes this week.

Last Week’s Price Review

The yen is currently the second strongest currency of the week (as of 8 am GMT). And if the yen can stay on the winning side until the end of the week, then that will mark the second week of broad-based yen strength.

Overlay of Inverted JPY Pairs & US10Y Bond Yield (Black Line): 1-Hour Forex Chart
Overlay of Inverted JPY Pairs & US10Y Bond Yield (Black Line): 1-Hour Forex Chart

Interestingly enough, the yen didn’t track bond yields very closely this week, very likely because market players are wary of what the BOJ will do next week, given the rumors that have been flying about since last Friday.

Anyhow, the yen strengthened from the get-go, likely as an extension of last week’s yen rally that was sparked by a report from Reuters released late last Friday, which claimed that the BOJ will discuss possible tweaks to its super loose monetary policy.

Moreover, Bloomberg released a similar report before the markets opened on Monday, which likely reinforced the idea that the BOJ may announce changes to its monetary policy.

However, the Bloomberg report did note that the unnamed sources stressed that “there’s little likelihood of a significant change on July 31 to yield-curve control or asset-purchase settings.”

Even so, the core message here is that change may finally be coming to the BOJ’s monetary policy, and that’s what market players likely focused on.

And remember, the yen has been taking a lot of directional cues from bond yields, U.S. bond yields in particular, because the BOJ’s so-called “QQE With Yield Curve Control” framework aims to keep the yield of Japanese government bonds (JGB) at around 0%, which makes Japanese bonds less attractive and forces Japanese investors to look for higher yields elsewhere. And it just so happens that U.S. government bonds have been one of the major destinations of Japanese capital.

Speaking of JGB yields, the yield of benchmark 10-year JGBs climbed to a one-year high on Thursday as speculation that the BOJ may tweak its monetary policy ramped up, which is very likely why the yen powered its way higher (except on USD/JPY and CAD/JPY), even though U.S. bond yields were higher on the day.

Incidentally, the yen’s broad-based rise on Thursday is the main reason why the yen is currently on the winning side.

Getting back on topic, the yen tried to extend its bullish run on Friday, but began to run out of breath when the BOJ announced unlimited bond purchases to push the yield of benchmark 10-year JGBs back down.