Economists at Standard Chartered expect the Bank of Japan (BoJ) to end its negative interest rate policy (NIRP) in March rather than April, alongside a de facto removal of yield curve control (YCC). They analyze the implications for the Japanese Yen (JPY).
Potential end to YCC accompanied by a greater tolerance for higher long-end yields should be JPY-positive
While the JPY has rallied and markets are already pricing in 6 bps of hikes by April, we think the BoJ could surprise with an earlier move in March. Even if the BoJ does not hike in March, the market would expect it to hike in April; market reaction should therefore be limited either way.
The removal of NIRP will not reverse negative yield differentials with other DMs, given that the anticipated policy adjustment in March is unlikely to signal the start of an aggressive rate hiking cycle by the BoJ. Nevertheless, a potential end to YCC accompanied by a greater tolerance by the BoJ for higher long-end yields should ultimately be JPY-positive, especially if our expectation for the Fed and ECB to start cutting rates from June pans out.
In that vein, risks are tilted to the downside for our USD/JPY forecast of 145.00 by the end of Q2-2024.
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