[ForexNews]

1) the BoJ gave in to government pressure; 2) it only offered a half-baked response to deflation and JPY appreciation; and 3) its decision was inconsistent with its recent actions, including its upward revisions to the economic assessment. While the BOJ action yesterday was small, it signalled a significant change of stance that seemed largely related to recent FX moves. In this sense, it was a warning shot signalling their co-operation with the MoF in terms of readiness to stop the JPY from appreciating. Long-term Japanese yields fell sharply yesterday, consistent with the possibility that the BoJ could be pushed into more aggressive QE over the next few months. This risk, combined with the worsening outlook for the Japanese budget deficit, is bad news for the JPY.

The relatively small decline in the JPY suggests the FX market is interpreting the limited BoJ action as a substitute for intervention rather than as an explicit first step in that direction. It is possible that the absence of intervention so far is because the MoF is still working on getting the "approval" for such action from its G7 colleagues, rather than an unwillingness to intervene. In any case, the BoJ remains willing to adopt more aggressive easing if required at future meetings, which could come alongside concerted FX intervention by the MoF. While some continue to believe that a significant move higher in USD/JPY will be led by a rise in US long-term yields following the end of Fed asset purchases, the recent actions by the BoJ reduce the downside risk for USD/JPY and are likely to mark a medium-term turning point for the exchange rate.