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Analysts at Nomura explained that thanks to lower expectations of BOJ rate hikes, USD/JPY’s reaction to operation tweaks, if any, should be more muted.

Key Quotes:  

“In H1 this year, USD/JPY was more sensitive to JGB market volatility in a negative way, but this sensitivity has returned to being neutral since July’s BOJ meeting.

 USD/JPY’s high sensitivity to the JGB market in Q1 explains the major divergence between rate spreads and USD/JPY.

However, as BOJ normalisation expectations have fallen, USD/JPY has followed rate spreads well. The Fed is still on track to hike in December and in 2019, and we judge downside risks for USD/JPY remain limited.

Higher FX hedge costs will increase lifers’ demand for USD if USD/JPY falls from its current level.

A Reuters article also said the Bank is not in a rush to change its operations, and the recent aggressive purchases of ETFs suggest the BOJ remains dovish, and it may not want to shake the market while volatility is higher globally.”