JPY: Will the BoJ raise their 10-year JGB target? - MUFG

The BoJ’s shift to yield curve control in September has contributed towards the sharp rewidening of yield spreads between overseas and Japan and the weaker yen by dampening upward pressure on domestic yields notes Lee Hardman, Currency Analyst at MUFG.

Key Quotes

“The yield on the 10-year US government bond has increased by around 0.90 percentage point since the end of September compared to only around 0.2 percentage point increase for the yield on the 10-year Japanese government bond.”

“The modest move higher for the yield on the 10-year Japanese government bond has been supported recently by building speculation that the BoJ could raise their target from around 0.00%. A WSJ report speculated that the BoJ could be the next major central bank to tighten monetary policy following the ECB’s “dovish taper”. The WSJ has speculated that the case for raising their target JGB yield has been strengthened by the improving economic growth outlook with the BoJ expected to raise their assessment for Japan’s economy for the first time since May 2015 when they next meet on the 19th -20th December. The report speculates that the BoJ are examining whether to remove the language about sluggish exports.”

“Our colleagues from Mitsubishi UFJ Morgan Stanley in Tokyo are sceptical that the BoJ will raise their target for the 10-year JGB yield prematurely. They are not convinced that the current underlying inflation trend will provide the BoJ with sufficient confidence to tighten monetary policy even if it is expected to pick up towards 1.0% next year. A decision to raise nominal interest rates would also risk undermining their plan to encourage lower real interest rates to help lift inflation to target as soon as possible.”

“Policy is more likely to be tightened in the year ahead by slowing the pace of QE. A recent Bloomberg report has highlighted that the pace of purchases has already slowed modestly this year totalling around JPY71.7 trillion compared to JPY75.3 trillion over the same period of last year. Our colleagues from Mitsubishi UFJ Morgan Stanley in Tokyo expect the BoJ to scrap their current annual JPY80 trillion target for JGB purchases in the first half of the next fiscal year. The likelihood of modestly tighter BoJ policy in the year ahead supports our view that the current scale of yen weakness is unlikely to prove sustainable beyond the near-term.”