BREAKING: Japan to allow even higher yields!
Nikkei reports that the BoJ will allow 10yr bond yields to exceed 1% after tomorrows meeting. Here is all you need to know ahead of it!
Here is what we wrote to clients ahead of Nikkei now reporting that the BoJ will raise the target of the yield curve control tomorrow.
”It is a no-brainer for the BoJ to increase the inflation forecast given how firm inflation has been relative to forecasts, but the big question is whether it matters for the policy decision? The short answer is yes.
When the BoJ moves the needle a lot (as in July), they also move the needle on policy. Expect another move in the YCC-cap of 25 bps with even greater flexibility introduced and expect a weaker JPY again.
The inflation forecast from July predicts 2.5% CPI ex-fresh food inflation for the fiscal year 2023. The September print was the first print (since April) below 3%, why a forecast of at least 3% seems likely unless the BoJ expects material disinflation from here and until April 2024.”
When the BoJ lifts the YCC cap, they typically follow up with heavy QE-buying to control the pace of the move in the yield curve. We have highlighted the moves in Dec-22 and July-23 in the chart below.
This is exactly why another increase in the YCC cap can be construed as JPY negative news if the BoJ again increases the balance sheet relative to peers to try and control the developments.
If you want to understand the mechanics around the BoJ and how JPY markets impact USD, EUR and CNY markets, please find our full coverage by following the link here → https://stenoresearch.com/watch-series/japan-watch-markets-are-unprepared-for-boj-action/
Chart 1: BoJ purchases across the curve – large spikes after changes in the YCC
Only a matter of time for the JGB10Y to hit 1.5% if so that means ¥ will rise and Nikkei should fall, all in all doesn't bode well for US equities in my opinion, at least historically if we look at 2007 when JGB10Y capped at 2% the Nikkei was much lower than here and ¥ much higher, so will see if this dynamic replays again. Yes much more QE has led to asset prices elevated but nobody knows what the real price level is with Fed Funds at 5% in my opinion...