Our baseline expectation is that the BoJ will adjust the parameters of its yield curve control framework by July. Widening the tolerance band around the 10-year JGB yields to at least +/- 75bps is one option. But there is the risk that speculators will attack the new peg, forcing the BoJ into a de facto crawling yield peg.
  • The incoming Bank of Japan (BoJ) Governor Kazuo Ueda’s comments on his policy intentions have been carefully worded throughout the recent parliamentary hearings. 

  • However, Ueda acknowledged that some “surprise” policy shifts are necessary to avoid persistent speculation. 

  • The window for action is narrow as the economic data will shift meaningfully over the next 6 months, with inflation pressures likely to fade rapidly. 

  • Our baseline expectation is that the BoJ tweaks the parameters of yield curve control (YCC) by the July meeting. One option is to widen the tolerance band around 10-year JGB yields to at least +/-75bps. 

  • Communication of the new policy stance is key. Any change must be accompanied by a clear statement of next steps and associated waymarks to help manage investor expectations. 

  • Targeting the yield level of shorter maturity bonds – perhaps the 5-year sector – is also a possibility, as the BoJ may find it has more control over shorter maturity bonds. 

  • A successful policy change would help re-anchor yields at a credible new level and improve market functioning. 

  • However, there is a strong risk of the new peg also lacking credibility and facing sustained speculative attack. 

Related articles