Japan: BoJ tweaks YCC – Global bond market takes a hit
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Bank of Japan (BoJ) surprised the market this morning by raising the upper band on its yield curve control (YCC) policy from 0.25% to 0.50%.
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Bond yields in Japan rose on the news with spillover to global bond markets and the Danish callable bond market. USD/JPY dropped to 132 on the move.
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We expect a policy rate hike to 0% in Q2 followed by a 25bp increase in the yield target to 0.25% and an increase in the fluctuation band from -0.25% to 0.75%.
In a surprise move, BoJ adjusted its yield curve control this morning. BoJ widened the band around its 10-year 0% yield target to +/-50bp from +/-25. The official explanation is that it will allow for a smoother formation of the yield curve. The move comes with a pledge to sharply increase bond buying, in order to stress that this is a fine-tuning move and not tightening. At the press conference, governor Kuroda also did his best to communicate that it is not a tightening move.
Inflation has picked up in Japan, but it remains an imported phenomenon. Service inflation, for instance, is on the rise, but still stands at just 0.8%. An increase in wage pressure is key for BoJ to achieve its goal of reflating the economy permanently. It remains our base case that a global recession will obstruct a significant increase in wage pressure. However, we see a risk that a new governor will differentiate less between domestically created inflation and imported inflation and will use this opportunity to modify BoJ’s extreme position among global central banks – it is the only major central bank left with an easing stance.
Spring will be crunch time in Japan with the annual wage negotiations and a scheduled replacement of all three governors in BoJ. Based on today’s move, we think the probability of further moves next year has increased and we expect a move away from negative interest rates after a new governor has been appointed, followed by a further loosening of the yield curve control. Specifically, we expect a policy rate hike to 0% in Q2 followed by a 25bp increase in the yield target to 0.25% and an increase in the fluctuation band from -0.25% to 0.75%.
After the announcement today the market has started to position for a possible rate hike from BoJ. The market now discounts a full 10bp interest rate increase by April, which would take short-term Japanese interest rates back to zero and a full 25bp interest rate increase by August. Yesterday, the market did not expect a full 25bp increase until November, i.e. the market expects a possible rate hike in Japan to be a theme for H1 next year.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
