The Bank of Japan’s decision to tweak its yield-curve control mechanism looks set to embolden yen bulls betting the central bank is moving toward normalizing policy.
(Bloomberg) — The Bank of Japan’s decision to tweak its yield-curve control mechanism looks set to embolden yen bulls betting the central bank is moving toward normalizing policy.
That’s the view of market watchers after the BOJ allowed the yield on 10-year bonds to trade as high as 1%, a step to adjust its super-easy monetary settings after having long lagged hawkish peers like the Federal Reserve and the European Central Bank. That said, widening the band means the YCC may remain for awhile yet, strategists say.
Read More: BOJ Loosens Grip on Long-Term Yields in Ueda’s First Surprise
Here’s what analysts and strategists had to say:
Yen to Strengthen
Sean Callow, senior strategist at Westpac Banking Corp. in Sydney
“I am surprised dollar-yen isn’t considerably lower. It’s one thing to say that 0.50% isn’t a line in the sand, it’s another to say we won’t be worried until 1.0%,” he said. “It might take a couple of days but I see the risks back to 137-138” per dollar, he said.
David Lu, director of NBC Financial Markets Asia in Hong Kong
“In the short term, YCC is likely to survive for the foreseeable future and the dollar/yen pair’s downside may be limited,” he said. The pair is likely to trade between 137 and 142 yen per dollar before dropping to 135 by year end, he said.
Daisaku Ueno, chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo
“As the BOJ allows the long-term interest rate to rise to 1%, they don’t have to adjust this framework for quite a while,” he said. “While the policy rate is kept at -0.1% and the long-term rate will not rise beyond 1%, it’s unlikely to see aggressive inflows without hedge to Japan, limiting the degree of the yen’s strength from here. Direction of the dollar-yen and JGB yields is mainly dictated by the US and will be even more so without the cap.” The dollar-yen may fall not because of the yen’s strength but also triggered by US factors, such as a weak US economy and subsequent Fed rate cut prospects, he said.
Mark McCormick, head of FX and EM strategy at Toronto Dominion Bank in Toronto
“Politically, the excessive weak yen and higher inflation has been a thorn in the side of policymakers. The flex operations of YCC could help to anchor USD/JPY,” he said. “The signal for USD/JPY rests in the act itself, as the tweak is just another piecemeal step policy normalization, which is likely to increase market interest in further normalization down the road.”
Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank in Tokyo
“Foreign investors may interpret that the Bank of Japan has also scaled back its easing measures and buy the yen,” Sera said. “Dollar-yen might see downward pressure as this is a makeshift measure allowing the interest rates to rise in fact.”
James Athey, investment director of rates management at abrdn in London
“Of course the yen has been a beneficiary as you would expect but the move is much less violent than the one seen in December but I do believe we should see follow- through strength in the coming days as I am sure this change will lead some to re-asses their yen-funded carry trades. While front-end rates remain pinned around 0%, the yen will still screen as a very attractive funder so I don’t think the carry trade is completely finished here at all.”
JGB Yields to Rise
Akio Kato, chief manager of the strategic research and investment division at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo
Ten-year yields may climb to as high as 0.8% in the coming months, he said. “There’s a good chance that the goal of 2% inflation will sustainably be met. The BOJ’s commitment to keeping nominal yields at or below 1% means real yields will stay negative, which exerts very strong stimulus effects.”
Teppei Ino, Tokyo head of global markets research at MUFG Bank
“The Bank of Japan’s decision itself is to maintain the status quo, but it feels like a de-facto interest rate hike. Going forward, the focus will be on where yen interest rates will settle down. As the 10-year interest rate is expected to hover at a level close to 1% more and more, there is a possibility that the unwinding of yen selling will put upward pressure on the yen.”
Daisuke Uno, chief strategist at Sumitomo Mitsui Bank in Tokyo
“The BOJ’s fixed-rate operation at 1% only works if bond yields rise to those extreme levels. It’s almost hypothetical and hardly realistic. In other words, what the BOJ is saying today is, we will withdraw from guiding bond yields, and let market players decide the pricing of bonds,” he said. “There is hardly any incentive for markets to attack the 1% cap now. I could think of 0.6% in 2014 and 0.74% in 2013 as a possible target, but I doubt the market will test thus far.”
US Treasuries Attractive
Gordon Tsui, managing director and head of fixed income of Ping An of China Asset Management in Hong Kong
“BOJ’s widening of the YCC band, effectively to +1%, will be interpreted by UST investors as a selling pressure because JGB yields will likely move higher. However, after the first surprise change back in December 2022 and the accompanying move in Treasuries back then, investors now expect the magnitude of the follow-through re-pricing in US rates will be relatively contained than would otherwise happen. In fact, month-end duration extension demand for UST can take advantage of this uptick in yields by placing some bottom-fishing buying orders in this market move.”
Mixed Bag for Japan Stocks
Nicholas Smith, strategist at CSLA in Tokyo
“Faced with a binary choice, the BOJ chose both, thereby pouring accelerant on its credibility and willfully torching it. This way it gets to appear both cloth-eared by continuing to waterboard consumers through inflation, while also inviting speculators to snipe at its now half-hearted ceiling. Effectively, however, this was a hike of the YCC ceiling to 100 basis points, opening up the throttle on bank stocks’ outperformance.”
Tony Sycamore, market analyst at IG in Sydney
“With the BOJ taking its first steps towards exiting its ultra easy monetary policy settings, it undermines a large part of the reason why the Nikkei has rallied to 34,000 in the first place.” Nikkei may have fallen enough today to find support at its mid-July low, but it’s likely to continue dropping over the next week, he said.
Yoshihiro Takeshige, senior fund manager at Asahi Life Asset Management Co. in Tokyo
“In a nutshell, it means that YCC has made its operations more flexible, but my impression is that this degree of flexibility will not have much of an impact on Japanese equities,” he said. “Given that business confidence in Japan is better than in other countries, that the forecast for profit growth this year is relatively high, and that monetary policy will be maintained at this level for the time being, I believe that there will be another timing for foreign investors to buy.”
Rashmi Garg, senior portfolio manager at Al Dhabi Capital in Dubai
“We’ve been positioned in our portfolio for this, we expected Japanese financial stocks to do well,” she said. “There’s a little bit of lack of clarity, but this is an indication of the direction forward, so there’s an openness to raising rates. It’s very logical that the carry trade will bring in the flows back to Japan which means Japanese yen may appreciate and hurt export stocks, but this is something that has to happen.”
–With assistance from Yumi Teso, Yasutaka Tamura, Iris Ouyang, Masaki Kondo, Hideyuki Sano and David Finnerty.
(Adds abrdn quote. An earlier version of this story corrected a yen forecast range for NBC Financial.)
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