Monitoring the BoJ: Further YCC Widening Imminent

Go to: Tracking Stress in the Curve | Recent Voter Comments ǀ Surveys and Data

Summary of Views

• The BoJ surprised the market with a widening of its yield curve control band (YCC) in December. As we previously warned, indicators of market stress point towards another imminent adjustment. We lean towards a move to +-1%.
• 10Y JGB yield is tracking close to the upper bound, but the market disruption that incentivised previous adjustments remains strong. Swap spreads remain close to their wides, futures/spot arbitrage has reappeared and the distortion in the yield curve remains close to extremes (see Charts 1-6).
• Recent BoJ comments have been relatively light re: the YCC. BoJ speakers have been highly focused on the prospects for wage growth sustaining inflation rather than the current CPI beats (see recent comments section).
• The choice of Governor Kuroda’s successor will be highly informative as to the direction policy. If Deputy Governor Amamiya succeeds him, then ultra-easy policy may persist, but if it is former-Deputy Governor Hiroshi Nakaso then it would suggest a break from the previous regime given his comments around the limitations of ultra-loose monetary policy
• Regular wage growth for full-time and part-time workers continues to trend higher, with part-time pay growth particularly strong (albeit down from highs). A decline in bonus payments, however, provides a strong headwind to full-time employee pay.  Manufacturing confidence is in decline, but services is rising. Suppressed marginal propensity to consume is keeping total consumer spending down (see surveys and data).

Tracking Stress Within the Curve – Rationale for Another YCC Shift

Recent Voter Comments

Surveys and Economic Data

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)