why Japan central bank tweaking monetary policy strengthens yen

Question

why Japan central bank tweaking monetary policy strengthens yen

In: 5

Answer 1

For the better part of 2 decades or more, Japan has been in a deflationary period. The BOJ has been trying to push inflation up and it has remained low to negative. Any policy that tries to push up inflation generally pushes down the exchange rate (broadly speaking).

So the recent ‘signal’, which may have been misread, is that the BOJ would allow greater leeway on 10 year bond yields (allowing yields to rise). Increasing bond yields (ie more return on bonds), tends to push bond prices higher (bond prices move opposite to yield), stocks lower (stock prices tend to move opposite to bond prices) and exchange rates higher (higher yield on bonds increases demand for yen).