Yen & UST Yields Tumble After BoJ's Mixed Messages, But...
The market was well prepared for action from the Bank of Japan (BoJ) tonight after Nikkei reported the central bank's intent to consider another tweak to its yield curve control (YCC) policy.
Having moved from 0.25% to 0.5%, then to 1%, the Nikkei report prompted speculation that the central bank would raise the limit again, rather than abandoning YCC altogether, as JGB yields have traded up close to the 1% limit in recent days.
The report noted that "the second framework tweak in three months appears to have been deemed necessary as 10-year yields are approaching 1% amid a backdrop of rising U.S. rates" and added that the "BOJ is also likely to more flexibly conduct its JGB purchase operations... This, along with a more flexible cap on 10-year yields, is aimed at deterring speculators from targeting the upper limit and sparing the BOJ the need to buy droves of JGBs to keep rates under 1%."
However, consensus is that BoJ will stand pat as historically the BoJ has paid less attention to market expectations than, say, the Fed.
If USDJPY was anything to go by, it was starting to remove the odds of a BoJ YCC adjustment, as JPY weakened back from earlier gains on the Nikkei report...
As we detailed earlier, no matter what the BOJ does today, the decision is sure to move markets.
A policy hold could spur yen selling.
There’s a good chance, though, that a sharp move beyond 150 against the dollar would invite intervention by Japan’s authorities to defend the currency.
A tweak to the YCC parameters, such as lifting the 10-yield yield ceiling to 1.5%, could support the yen.
But any strengthening would probably be limited to at most about 145 against the greenback, given the upward tug on the dollar from relatively high US yields.
Additionally, The BoJ is expected to raise its inflation forecasts for both this fiscal year and next. This would likely bring Japan’s key inflation above 2% for three straight years, which of course leads to the question of why the BOJ still needs to continue with the current stimulus policy given its side-effects.
So what will they do...
Meanwhile at the BOJ... pic.twitter.com/rwyJGCG8qD
— zerohedge (@zerohedge) September 27, 2023
Well, earlier today, Prime Minister Fumio Kishida was asked in parliament ahead of the decision whether the BOJ’s ultra-easy policy was weakening the yen and causing price rises. Kishida, whose approval rating just hit a record low dur to soaring inflation, said central bank policy aims to achieve and maintain stable prices. He added that the government should coordinate with the BOJ on macroeconomic policies.
And while the BoJ has released a policy statement at 12:06pm Tokyo time on the average since the introduction of yield curve control in 2016, today the BoJ released its statement at 12: 27pm Tokyo time (exactly one standard deviation late to its norm) and kept rates unchanged:
BoJ maintains NIRP at -0.10% and 10yr JGB yield target at 0% but makes what was formerly a hard cap of 1% on yields into a reference range of 100bps up or down, vs the previous target of 50bps, thus making YCC even more flexible. The BoJ also says:
Will regard upper bound of 1% for 10yr JGB yield as reference in market ops.
Decision on YCC was made by 8-1 vote with Nakamura the dissenter.
Decides to make YCC more flexible.
Japan's inflation outlook is overshooting but due largely to prolonged rises in import costs.
Will guide market operations nimbly.
The most important changes of these is the BOJ's description of the 1% rate as "a reference", which sounds similar to the July 28 BoJ meeting, when Governor Kazuo Ueda made his first surprise move by maintaining the 10y yield target at 0% but said its 0.5% ceiling was a reference point and not a rigid limit. Back then, the BoJ offered to buy bonds at 1% and the JGB 10y yield was up 0.15% over the following week.
Likely, the BoJ would allow 10y bond yields to creep higher with potential rinban operations risk if the 10y bond yields advance higher much too quickly.
Additionally, the BOJ has also decided to abandon its daily fixed-rate bond-buying operations, its major tool for impacting rates, citing the “large side effects” it might entail. The BoJ also raised its economic growth but more importantly, its inflation forecasts...
... which means that all else equal, Kishida's approval rating is about to become even worse!
This is mainly due to the prolonged effects of a pass-through to consumer prices of cost increases led by the past rise in import prices and the recent rise in crude oil prices. Toward the end of the projection period, the Bank expects that underlying CPI inflation will increase gradually toward achieving the price stability target of 2 percent, while this increase needs to be accompanied by an intensified virtuous cycle between wages and prices.
Still confused? here is the BOJ's trademark "explainer" for what today's decision means. The bottom line is that the 1.00% cap is officially gone and instead the BOJ will allow 10Y rates to rise above the former hard limit at which point it may or may not engage in "nimble market operations."
The initial reaction to the BoJ's moves implied a less hawkish than expected statement, prompting JPY weakness, breaking back above 150/USD...
JGB yields tumbled back...
And so did 10Y UST yields...
However, as UBS trading desk explains:
My interpretation of the changes are that the previous YCC target of 0% +/-50bp was the loose target, allowing 10y JGB yields up to 1%, where it would conduct daily fixed-rate purchases if needed.
Now the operations will not necessarily be at 1.00%: "The bank will determine the offer rate for fixed rate purchase operations each time, taking account of market rates and other factors."
Effectively the BoJ has raised the yield cap without saying where it is - still trying to let the markets find the natural balance of supply and demand whilst keeping a lid on bond vol
So nothing would surprise us more than to wake up in the morning and see all this reversed.
Finally, Bloomberg's Gearoid Reidy asked a fascinating question: does the BOJ actually want to control the yield curve?
The statement says:
"It is appropriate for the Bank to increase the flexibility in the conduct of yield-curve control, so that long-term interest rates will be formed smoothly in financial markets in response to future developments."
That’s just... the market, surely? Where is the control? Does YCC even effectively exist anymore?
How long until the market realizes that Japan's legendary YCC no longer actually exists?
