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JP Morgan: JPY and Bank of Japan July policy meeting (July 28)
The BOJ announced it will more flexibly manage YCC with the +/- 0.5% band maintained at its July meeting, says Katsuhiro Oshima at JP Morgan. According to the statement from the BOJ, he says the background of this change is in the recent upward momentum of wage growth and inflation, which could put upward pressure on long-term interest rates going forward and could potentially lead to the dis-functioning of the JGB market. At the same time, Oshima says it seems that the BOJ aims to set a de facto upper limit for the 10yr JGB rate at 1%. Adding this strategy would help to achieve a balance between monetary loosening and financial stability, reduce excess volatility of the JGB market, and manage potential risk for the fiscal side of the Japanese economy, he says. The BOJ also likely considers the trade-off between expanding its balance sheet by increasing JGB purchasing and the marginal benefits obtained by strictly controlling the long-term interest rate, according to Oshima. These points were alluded to by Governor Ueda in the press conference held after the policy meeting, he says. Ueda insisted that the adjustment this time aims to enhance the sustainability of YCC, says Oshima. Click here if you would like to speak to the analyst.
Capital Economics: Yield curve control is effectively over (July 28)
The Bank of Japan has announced that it will allow 10-year yields to rise above the 0.5% ceiling – which it says it is retaining – to a new “just-in-case” cap of 1.0%, says Marcel Thieliant at Capital Economics. He says with signs mounting of a virtuous cycle between inflation and wages, the chances of the Bank lifting its short-term policy rate as well are rising. However, Thieliant still thinks that a slowdown in inflation will convince the Bank to refrain from further policy tightening over the coming months. Click here for the full report. Click here if you would like to speak to the analyst.
TD Securities: Global rates – BoJ does it again (July 28)
The BoJ has tweaked the 10y JGBs trading band to the 1% levels, says Pooja Kumra at TD Securities. She says the unexpected move is making its way across rates with OATs leading the way. The key for markets will be the new range that 10y JGBs make for themselves, according to Kumra. She notes in the previous tweak, the 10y JGBs managed to hover on average at 42bps (Dec-July) with not much increase in BOJ buybacks. Markets may want to test the BoJ flexibility at first, says Kumra. As the dust settles, she says we could see JGBs stabilizing in the 60-70bp range, which limits its impact on global rates. Click here for the full report. Click here if you would like to speak to the analyst.
Gavekal Research: A stealth reversal in Japan (July 28)
Back in the 1990s, Alan Greenspan delighted in contorted word plays to put studied ambiguity into Federal Reserve communication. While the fashion among central bankers has since moved toward plain speaking, the Bank of Japan is a holdout. On Friday, it effectively backed off its ultra-aggressive monetary policy stance, but insisted it was only tweaking its yield curve control tool to give it more flexibility. Gavekal’s Udith Sikand argues that an era of ultra-easy money in Japan looks to be ending, with consequences for global funding markets. Click here for the full report. Click here if you would like to speak to the analyst.
The below pieces were published before today’s meeting:
Steno Research: Japan Watch – the pros and cons for Ueda (July 24)
The JPY market is one big roller-coaster at the moment as the market constantly tries to sniff out potential clues on when the Bank of Japan will catch up to the rest of the G10 central banks with a tighter policy, according to Steno Research. In this report, the firm considers the pros and cons of a move from the Bank of Japan at its Friday meeting. Steno notes markets started pricing in an elevated risk of a further increase to the yield-curve-control cap on Friday after a spike in wage data three weeks ago. All-in-all, however, the firm says the aggregate of arguments favours a continued unchanged policy stance despite an upwards revision to inflation projections. Click here for the full report. Click here if you would like to speak to the analyst.
Gavekal Research: Not if, but when at the Bank of Japan (July 26)
Ahead of the Bank of Japan’s two-day policy meeting that concludes on Friday, market opinion is divided whether the BoJ will abandon, adjust or simply leave unchanged its yield curve control policy, says Udith Sikand at Gavekal Research. He says an abrupt change of policy direction is possible; the BoJ has sprung surprises before. But recent comments from new governor Kazuo Ueda and his cohorts suggest the BoJ is going to hold its current course for a while longer, according to Sikand. Nevertheless, he says it is increasingly clear that the macro conditions are now in place for the BoJ to begin to reverse its ultra-aggressive easing. The question is no longer “if?” but rather “when?” and “how?”, says Sikand. Click here for the full report. Click here if you would like to speak to the analyst.
Bank of America: BoJ preview – are we there yet? (July 27)
Izumi Devalier at Bank of America Global Research expects the Bank of Japan to maintain its key policy settings at its July monetary policy meeting. She says, however, around 20% of analysts and investors expect the BoJ to tweak YCC this month, making this a “live” meeting. Devalier says market expectations for policy change at the July MPM fell, following dovish comments from Governor Ueda at the 28 June ECB Sintra forum. However, speculation of policy adjustments were re-kindled following a strong May wage print, she says, and the 7 July publication of a Nikkei Shimbun Interview with deputy governor Uchida. Devalier says market participants focused on Uchida’s comment that, in considering adjustments to YCC, the BoJ will “make a balanced decision with an eye on how to effectively maintain monetary easing while being mindful of [the impact on] financial intermediation and market functioning.” The timing of the interview, coupled with Uchida’s repeated reminder that the BoJ “would not be able to provide a ‘definitive’ answer for upcoming policy decisions in advance,” has led some investors to speculate that his comments were a subtle nod to YCC adjustments at the July policy meeting, she says. Click here if you would like to speak to the analyst.
Steno Research: Positioning watch – the Goldilocks scenario is intensifying (July 23)
In its positioning watch report, Steno Research dissects how traders and investors are positioning themselves in the current market. As with every other rally, retail investors end up blindly following the big players, and long risk might very well be the play to make as flows from ETFs and retail investors continue to lift markets, says the firm. And with that in mind, Steno has a look at what various surveys are telling them about the current market. Markets have been riding strong on the dovish CPI report last week, and the firm says frankly it doesn’t see a scenario where the Goldilocks scenario of higher growth and waning inflation doesn’t lift markets to new highs. But remember says the firm: the higher you climb, the deeper you fall. Click here for the full report. Click here if you would like to speak to the analyst.