The USD/JPY exchange rate jumped to the highest level since October last year as investors focused on Japan’s bond market. It was trading at the important resistance level at 150, 17.6% above the lowest level this year.

The Japanese yen has been one of the worst-performing currencies in the developed world. It has plunged by almost 50% from the highest level during the Covid-19 pandemic. This happened because of the Bank of Japan (BoJ), which has deviated from other central banks like the Federal Reserve, Bank of Canada, and Bank of England.

These central banks started hiking interest rates in 2022 as inflation started rising. The Fed has pushed them from 0% to 5.50% and pointed to more increases in the future. Similarly, the European Central Bank (ECB) and the Bank of England have pushed rates to multi-year highs.

The BoJ, on the other hand, left interest rates in the negative zone and continued with its quantitative easing (QE) program. It only ended its yield curve control a few months ago. This means that money supply in Japan has remained at an elevated level.

Now, the USD/JPY pair has surged as Japan bond yields have soared, pushing the Bank of Japan to intervene. The yield of the 10-year government bonds to 0.80%, the highest level since 2013. 

Bond yields move in the opposite direction with prices. As a result of poor government bonds demand, the BoJ has been forced to buy bonds worth billions of dollars in the past few months.

It is unclear how these actions will impact the Japanese yen market. One potential solution would be to hike rates, which is unlikely for now. Economists believe that the bank will exit negative rates in 2024.

USD/JPY chart by TradingView

The weekly chart shows that the USD to JPY exchange rate has been in a strong uptrend in the past few months. It has remained constantly above the 50-week moving average. The stock has formed an ascending channel.

Most recently, it has formed a small rising wedge pattern, which is one of the most popular bearish signs in the market. Therefore, with the rising wedge nearing its confluence level, there is a likelihood that it will soon have a bearish breakout.

The alternative scenario is where the pair continues surging as buyers target the next important level at 151.95, the highest point in October last year.

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