​BOJ decision is too slow to prop up yen

The BOJ announced further adjustments to its YCC policy on Tuesday, allowing 10-year government bond yields to increase above 1% in a move that follows the chronic weakening of the yen.

The board also revised up its price forecasts to project inflation well exceeding its 2% target this year and 2024, paving the way for end of ultra-loose monetary policy. Still the yen dipped below 150 per dollar.

Japan’s core inflation in September fell below 3% for the first time in more than a year on the back of lower imported fuel prices. Some economists warned that Japan’s above-target inflation could be stickier.

In October, the Japanese Trade Union Confederation said it was seeking bigger wage increases during next year’s negotiations.

Prime Minister Fumio Kishida has also pledged to raise minimum hourly wages from ¥1,000 to ¥1,500 by the mid-2030s.

Despite repeated assurances by Ueda that ultra-low interest rates will stay, nearly two-thirds of economists polled by Reuters expect the BOJ to end negative rates next year.

Fallout risk

There are risks to making an adjustment only three months after the last tweak but it is deemed necessary as 10-year yields are approaching 1% amid a backdrop of rising US rates.

The 10-year Treasury yield remains slightly below the key psychological level. The Fed could deliver another hawkish pause this week, potentially extending bond selloff.

That means additional bond buying would be required to defend the current policy framework, thereby raising questions about the viability of easing programme.

While the latest decision reduces the need to ramp up bond buying, the governor may help push long-term rates higher to levels inconsistent with economic fundamentals, jeopardizing its goal of achieving stable inflation.

It may also offer a signal of fear for speculators on the prowl. The collapse of the RBA’s yield target in 2021 shows the risks of giving the impression a central bank is on the run.

Changing the upper limit as a precaution against the impact of soaring US yields would render YCC meaningless, said Shigeto Nagai, former head of BOJ’s international department.

Kentaro Koyama, a former BOJ official, warns that the pressure on YCC could be extremely strong by the next meeting in December given the inflation outlook and rising market expectations for normalization.

Yen weakness

Most economists surveyed by Bloomberg think Ueda wants to see more evidence of wage growth before finally scrapping negative interest rates.

He has argued that the main factor pushing up prices is a rise in import costs. There is no consensus within policymakers on how it would dismantle the policy crafted under Haruhiko Kuroda. 

Traders give up waiting for the yen to bounce as the dollar has dominated the pair. Options pricing suggested that a dramatic rally is unlikely to take place anytime soon.

Implied volatility at most tenors touched 18-months lows in Oct and skew shows a steady decline in the relative popularity of dollar/yen puts over the year to date.

The yen’s poor performance bitterly disappointed amid escalated conflict in the Middle East. Even with intervention risk, it might only stop the currency from falling rather than reverse the trend.

But Invesco’s fund manager Tony Roberts has cut positions in Japan exporters as he does not expect the yen to weaken much more further from here.

The Bank of Singapore said “we think there will be scope for the yen to significantly outperform in 2024 when we expect the Fed to cut rates and the BOJ to speed up normalizing policy.”

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