The yen traded flat on Wednesday after surging almost 4% in the previous session, when the Bank of Japan (BOJ) unexpectedly tweaked a key policy, allowing government bond yields more room to move.
The BOJ decided to change its "yield curve control" policy on Tuesday even as it kept broad policy settings unchanged. It is now letting 10-year yields move 50 basis points either side of its 0% target, wider than the previous 25 basis point band.
On Wednesday, the yen was last up less than 0.1%, trading at 131.55 per dollar, not far off the four-month high of 130.58 touched on Tuesday, when the yen jumped 3.8% in its biggest one-day rise since 1998.
The surge was a sign that traders expect the BOJ to further tighten monetary policy in coming meetings, said Derek Halpenny, head of research at Japanese bank MUFG.
The easiest way to express a view in this being the first step in a normalization process… was obviously in FX rather than in rates," he said.
Elsewhere in currency markets, the euro was up 0.11% against the dollar at $1.063. The British pound was down 0.25% to $1.216.
The BOJ's move marked a small step away from the central bank's ultra-loose monetary policy.
Japan, long preoccupied with reviving price growth to avert a risk of deflation, has been an outlier this year. It has kept interest rates negative while other central banks have hiked hard to tame inflation and bolster domestic currencies against the mighty U.S. dollar.
Traders are still digesting the BOJ's policy tweak, said Carol Kong, a currency strategist at the Commonwealth Bank of Australia.
