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The Japanese Yen can strengthen over the course of the next three months as the Bank of Japan takes steps towards a complete abandonment of its policy to contain Japanese bond yields, according to a Swiss bank Julius Baer.

A new analysis from Julius Baer's David Alexander Meier suggests tweaks to the Bank of Japan's yield curve control are likely at next Tuesday's meeting in light of a recent decline in the Yen's value that has taken it through a key threshold.

The tweaks "would help the yen stabilise", says Meier, putting it on track to strengthen to his three-month target, which is well below 150.

Speculation on the Yen's outlook increased this week following a breach of the Dollar to Yen exchange rate (USDJPY) of 150, a level considered to be a 'line in the sand' for Japanese authorities who have become uneasy about their currency's devaluation through the course of 2023.

There have been sudden drops in USDJPY on two occasions when it passed 150 (including Thursday), leading to speculation in financial circles that the central bank or authorities in the Ministry of Finance have intervened directly in the market to defend the currency.

"Whether the MoF has already started to intervene or not is not yet clear, as data on interventions are presented at the end of the month. In any case, a so-called ‘rate check’, which last year was a precursor of the interventions, has not yet been announced, with officials only stating that they are watching with great attention any undesirably large moves," says Meier.

Ultimately, though, any sustained strength in the Yen is only likely if the Bank of Japan eases its tight control over the value of Japanese bond yields.

The Yield Curve Control (YCC) programme is a form of quantitative easing whereby the Bank keeps yields under control by buying bonds, thereby ensuring the cost of money in Japan remains at affordable levels.

A side effect of this programme is that Japanese yields are incredibly uncompetitive to international and domestic investors, creating currency flows that soften the Yen.

Above: USDJPY price action on October 27, showing a breach of 150 and a sudden drop that might have indicated some form of official intervention.

But Julius Baer says even tweaks to the YCC programme can help the Yen going forward.

"The weaker yen raises the pressure for further tweaks to the yield curve control (YCC), such as raising the target from 0% to 0.5% and/or the upper cap to 1.5%, or, less likely, abandoning YCC entirely, all the more so because 10year Japanese government bond yields have risen to 0.87%," says Meier.

The Bank of Japan will announce the results of its upcoming policy meeting next Tuesday, 31 October.

"We continue to believe that tweaks to the YCC would have the potential to stabilise the yen," says Meier.

Julius Baer sticks to its forecast for the Dollar-Yen exchange rate to fall back to 145 over three months.

This move will be aided by the Swiss bank's expectation that the BoJ will completely abandon YCC early next year.