Market Strategist, Greater China
Summary: The Bank of Japan (BoJ) maintained its yield curve control (YCC) target for 10-year Japanese Government Bonds with a range of plus and minus 50 basis points around zero at the July monetary policy meeting. However, it introduced a more flexible approach, allowing deviations from the target range and setting a 1% cap on the maximum rise in the 10-year JGB yield. The BoJ retains discretion for bond buying between 0.5% and 1%. Market confusion ensued, but the BoJ's gradual departure from the YCC policy indicates potential implications for the Japanese Yen's strength and USDJPY exchange rate.
In a highly anticipated monetary policy meeting, the Bank of Japan (BoJ) decided to maintain its yield curve control (YCC) target, keeping it in a range of plus and minus 50 basis points (0.5 percentage points) from zero percent on the 10-year Japanese Government Bonds (JGBs). However, what caught the attention of market participants was the central bank's announcement of a significant shift in its approach, signaling greater flexibility and introducing the possibility of tolerating deviations within an unspecified extent.
Gone are the days when the BoJ adhered strictly to rigid limits for the YCC target range. Instead, it has adjusted its policy that the upper and lower bounds of the YCC target range are now mere reference points. The central bank tweaked its long-held YCC policy to give itself newfound flexibility and leeway to maneuver its monetary policy in response to prevailing economic conditions.
One concrete step taken by the BoJ to demonstrate this shift away, particularly from the upper bound, is the introduction of a hard stop on the maximum rise in the 10-year JGB yield at a much higher level of 1%. The central bank will now offer to purchase 10-year JGBs at a rate of 1% every business day through fixed-rate purchase operations, effectively capping the maximum increase in the 10-year JGB yield at 1%.
This move, however, gives the BoJ the discretion to intervene in bond buying between 0.5% and 1%, depending on its assessment of the then-prevailing economic landscape and market conditions. The BoJ apparently is cautious in exiting the YCC completely as it notes in its Statement on Monetary Policy that “sustainable and stable achievement of the price stability target of 2 percent, accompanied by wage increases, has not yet come in sight.” The BoJ says that it will continue to do quantitative easing (QE) “until the year-on-year rate of increase in the observed CPI (all items less fresh food) or core CPI exceeds 2 percent and stays above the target in a stable manner”.
In its Outlook for Economic Activity and Prices (July 2023), the median forecasts from the Policy Board Members on the CPI (all items less fresh food) for the fiscal year ending March 2024 was revised down to +1.9% from +2.0% (forecast made in the Outlook in April) and the forecast for the fiscal year 2025 stayed at +1.6% (Figure 1), both below the +2% target.
The initial reaction in the forex market was one of confusion about the message sent by an unchanged target range and the BoJ's discretion to maneuver long-term interest rates between 0.5% and 1%. It resulted in choppy swings of USDJPY between 141 and 138 within the first hour of trading after the policy announcement. Adding further to the confusion, BoJ Governor Ueda downplayed the significance of the changes and insisted that the policy shift was not a step toward the normalization of monetary policy.
Nonetheless, we believe that the BoJ's actions today signal a gradual departure from the YCC policy framework. While Governor Ueda's remarks calmed the forex market and brought the USDJPY back to 139.40, flat to its closing level last night in New York (Figure 2), the central bank appears to be taking a measured and controlled approach towards potentially abandoning the YCC policy.
As the BoJ moves away from strict YCC target limits and embraces a more adaptable stance, the Japanese Yen could witness strengthening trends while traders and investors direct their focus onto the increasing likelihood of the beginning of a new policy direction towards completely exiting the YCC under Ueda. When this rethinking of the timetable of the BoJ normalizing policies picks up momentum, it may leave the path wide open for USDJPY to test the downside.
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
