The yen held just stronger than 118.0 against the dollar ahead of the Bank of Japan policy announcement and, after temporary losses to 118.25, the yen strengthened to 117.25 in Europe on Thursday.
Following its monetary meeting, the central bank announced that it would end the quantative monetary policy after five years and switch to a environment of interest rate targets. The bank has also set a 0-2% reference target for the inflation rate. It will probably take several months for excess liquidity to be withdrawn from the system which will keep interest rates low and the bank has also pledged to keep interest rates close to zero over the next few months.
The commitment to low interest rates will reinforce the yen's lack of yield support and this will maintain the temptation to sell the yen on yield grounds, but the policy shift will still have important medium-term implications. A reduction in market liquidity will gradually tighten liquidity conditions and should lessen the potential for aggressive yen selling.
There will also still be capital repatriation back to Japan on seasonal grounds before the end of March and there will also be continuing pressure for a reduction in carry trades which will maintain a flow of funds into the yen. In this environment, the yen should be able to resist substantial losses, especially if there is are further stresses in emerging markets, as there will be greater caution over pushing funds overseas.