Bank of Japan Reviews 10 Year Yield-Curve Control Policy

Overview

What it covers is..
The Bank of Japan has slightly released the shackles on its ten-year yield target and stated it would review its YCC policy, surprising financial markets and sending the yen sharply higher.

Following are some statements from experts:

Hiroshi Namioka, Chief Strategist and Fund Manager, T&D Asset Management, Tokyo:

“It was an astounding decision at a time when the market had predicted a lame-duck situation near the end of Governor Kuroda’s terminology. It was a clever move, including the fact that it went against the economists’ expectations.” The latest policy framework will have authorized an endless bond-buying if everyone expects a shift—prestige to the Bank of Japan for the surprise.

“It could have been the final chance for the BOJ to move amid the incoming U.S. downturn and the end of the Fed’s increased rates. If later, it would have caused a much higher risk of strong yen reinforcing and other market volatility.”

Bart Wakabayashi, Branch Manager, State Street, Tokyo:

“They have these two bazookas left, removing the YCC and bringing interest rates up, even to positive regions. So there are huge bazookas that would move the yen vigorously.

“This is a small step to test out the strategy and see the market reaction and how much it’s reacting.”

“I think we are witnessing a toe in the water.”

Kerry Graig, Global Strategies, JP Morgan Asset Management, Melbourne:

“The movement arrived earlier than I had expected, but it is a step towards the normalization process of Japan’s policy.” However, it is only a baby step, and YCC remains in place, as does the negative rate strategy.

“Later, adjustments require the view that inflation has become constant and YCC was no longer necessary or that the negative impacts of yield-curve control exceed the supportive ones as inflation increases. The market implications are most widespread in the forex markets and provide a hint that the BOJ is moving gradually away from ultra-loose policy and should be yen positively in the future.”

Carol Kong, Currency Strategist, Commonwealth Bank Of Australia, Sydney:

“I think the movement was certainly unexpected, to say a little bit. However, whereas the dollar/yen just sold off distinctly on the back of yield-curve control alteration, I believe it does pave the way for a full neglection of the YCC scheme and probably a twirling from the ultra-dovish monetary policy that outlooks in the future.”

Ayako Fujita, Chief Economist, JP Morgan Securities, Tokyo:

“However, it would have been hard to modify the scheme after the market completely prices it in; the decision was reasonable, where the Bank of Japan could not keep letting the market expect a change.”

“Despite the leadership, whether Kuroda or a new governor, the tug was expected to some extent while providing the changing fundamentals, where the price inflation and yield expectations eventually increased.

“We do not expect further tweaks to the yield-curve control (be it in January and March meetings) because that would harm the market features.”

Moh Siong Sim, Currency Strategies, Bank of Singapore:

“They have widened the band, and I think it has come earlier than expected. So it raises questions about whether this is a forerunner of more to come, in terms of policy regulation.”

“The writing’s on the wall is that perhaps the sharp yen weakness that we’ve seen earlier was uncomfortable for bureaucrats, and that it is clear that it would add to the yen strength story next year.”

Christopher Wong, Currency Strategist, OCBC, Singapore:

“The timing of the policy twist is a shock. However, we were expecting it to happen in the second quarter of 2023, i.e., April, May, and June.

“However, the twist may seem moderate, but it is essential for a central bank that has held peace for a long time. The indication is lowkey improvement from wide UST (United States Treasury)-JGB (Japan Government Bond) yield in contrast and a moderate-to-soften USD profile that can lead to further disadvantage in USD/JPY.”

(the following statements mentioned above were reported by Ankur Banerjee, Rae Wee, Tom Westbrook in Singapore, Kantaro Komiya in Japan, and Scott Murdoch in Sydney.)