Bank of Japan’s “hawkish hold”: if it wants to avoid a bond market crash, does it have no choice but to sacrifice the yen?
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The Bank of Japan is deeply mired in a difficult policy dilemma—it must simultaneously stabilize the bond market, curb excessive depreciation of the yen, and support economic growth. However, unable to effectively balance these objectives, the yen has been forced to act as a "pressure relief valve" absorbing the contradictions of these policies.
Rich Privorotsky, Head of Goldman Sachs Delta-One business, analyzed that the BOJ is trying to send a tightening signal by being "hawkish but standing pat," yet also commits to maintaining bond market stability. This contradictory stance not only fails to support the yen, but in fact intensifies the pressure for its depreciation. Any currency market intervention that lacks fundamental monetary policy changes finds it difficult to reverse the yen's long-term weakness.
On January 23, the BOJ kept its policy rate unchanged but raised its economic growth outlook and released signals of possible further rate hikes in the future. However, this somewhat hawkish stance failed to stop yen depreciation, as the USD/JPY rate almost touched the critical psychological level of 160, then suddenly surged upwards—sparking widespread speculation about official intervention. Finance Minister Katsuyuki Katayama did not respond directly to this.
It is noteworthy that BOJ Governor Kazuo Ueda showed a high degree of concern for market functioning during a press conference, clearly expressed worries about long-term interest rate volatility, and stressed that the central bank is prepared to take action should disorderly volatility occur. Although he did not formally restart Yield Curve Control (YCC), he effectively kept some form of soft policy backstop, signaling that the central bank would still step in when needed to keep the bond market stable.
Hawkish Policy Signals, But Yen Under Pressure
Privorotsky, Head of Goldman Sachs Delta-One business, pointed out that the BOJ decision could technically be seen as "hawkish but standing pat." The BOJ not only raised its growth outlook but also maintained a somewhat hawkish inflation forecast. Kazuo Ueda even hinted that a rate hike could come earlier; he stated:
"April is a relatively concentrated period for adjustments, and this is one of the factors the committee considers when discussing future rate hikes."
However, Ueda mentioned at the press conference that under "unconventional circumstances," the BOJ may operate flexibly to promote market stability. This caused the yen to continue weakening after the decision. The market’s immediate reaction to the BOJ statement was logical: short-term rates rose, started to flatten, and the yen weakened.
Privorotsky wrote in a report:
"Ueda’s remarks actually hint at a possible restart of YCC, which directly triggered yen selling... Subsequently, the sharp rebound in exchange rate seems to be a small-scale joint intervention by the Ministry of Finance and the BOJ. The BOJ is both suppressing (negative for the yen) and trying to intervene in the FX market to support the yen—a contradiction that could spark fresh market turmoil."
160 Level Becomes Warning Line
In all four BOJ interventions in the FX market in 2024, the USD/JPY rate was around 160, providing the market with a relative exchange rate level for future intervention judgment. Friday’s exchange rate fluctuations happened close to this psychological threshold, raising alertness among investors. Any movements close to this point may trigger expectations of intervention.
Tokyo Central Tanshi FX trader Takayuki Tominaga said:
"Apart from possible official inquiry into exchange rates, the yen weakening after Ueda’s press conference may have triggered some preset trading instructions. Although the yen’s direction is very uncertain, market sentiment has clearly turned. If exchange rates approach the 160 level again, it will further affect market expectations."
Although trading volume visibly expanded last week, it's not significant compared with trading volumes during previous volatile periods. This may cause overall FX market liquidity to shrink, so relatively small capital flows could cause notable changes in exchange rates.
Structural Dilemma Hard to Resolve
Japanese monetary policy faces a deep dilemma: If it continues to avoid a clear strategic choice between “protecting the bond market” and “stabilizing the exchange rate,” and tries to rely solely on technical operations to maintain both, it may end up consuming policy credibility and form a vicious cycle of mutually reinforcing market volatility.
Goldman Sachs analyst Privorotsky pointed out: If the market starts to believe YCC may return in some form, the yen may face even greater depreciation. Goldman’s analysis notes the BOJ faces great difficulty in simultaneously achieving robust growth, high inflation, stable rates, and a stable FX rate. While capital returning to Japan offers some support to the yen, the yen still serves as a "pressure valve" caught between conflicting policy goals.
Behind the FX market shouldering policy pressure alone is the BOJ’s dilemma: It must maintain bond market stability with easy monetary policy, yet deal with inflation and social pressure caused by yen depreciation. If unwilling or unable to raise rates, FX intervention seems to be the only repeatedly used option.
However, with the timing of Fed rate cuts unclear and the US-Japan interest rate gap still wide, whether unilateral intervention can reverse the long-term trend remains a question hanging over the yen. Institutions like Goldman Sachs believe that interventions lacking structural adjustment can only serve as temporary "band-aids" for the market, while the yen—as the cost of the policy dilemma—may be laying the groundwork for the next round of more violent financial turmoil.
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