BoJ signals that it is unlikely to raise yield target in the near-term – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the yen has weakened modestly in the Asian trading session in part reversing some of the safe haven gains which following yesterday’s tragic events while the yen has also been undermined in part by the BoJ’s decision overnight to leave its monetary policy stance unchanged.

Key Quotes

“The BoJ remains committed to targeting the 10-year JGB yield at around 0% and continues to signal that it will purchase JGBs at an annual pace of about JPY80 trillion. The decision to leave monetary policy unchanged was in line with consensus expectations although there had recently been some speculation in the run up to today’s meeting that the BoJ may lift the yield target. By leaving the yield target unchanged it may help to ease some of the upward pressure on yields in the near-term and continue to support the sharp widening of yield spreads between Japan and overseas which has weighed heavily on the yen in recent months. We do not expect the BoJ to raise the yield target in the near-term, which is more likely to increase the pace of JGB purchases and/or carry out fixed-rate JGB purchase operations if deemed necessary to dampen yields. Governor Kuroda stated as well that it was “too soon” to discuss raising the yield target and that it won’t be raised in response to rate hikes abroad.”

“In the accompanying press conference Governor Kuroda sounded more upbeat stating that he sees growth continuing to exceed potential by “quite a bit”. The BoJ upgraded their economic assessment by one step describing both exports and industrial production as having “picked up”. The recent improvement in business sentiment evident in the latest Tankan survey was also acknowledged. However as prices still remain far off from the BoJ’s inflation target it makes it appropriate to continue current policy for now. The BoJ is still concerned that inflation expectations remain in a “weakening phase” highlighting that it is cautious about extrapolating some recent signs of improvement.”

“Governor Kuroda stated that the policy switch to yield curve control is working well as it has resulted in a steeper curve which is now described as “appropriate”. He acknowledged that monetary policy differences between the BoJ and Fed could affect the yen. However, he pushed back against suggestions that the yen is now too weak noting that the current yen level is not surprising and is only similar to the one from around February. BoJ Governor Kuroda’s comment that the yen is not “excessively weak” will likely reinforce current bearish sentiment towards the yen by signalling they have a tolerance for further weakness.”