JPY Sells Off As BOJ Keeps Policy Unchanged

But Introduces Flexible YCC Target

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Despite expectations, which were now clearly premature, of a shift in policy, the BOJ kept rates on hold.  Alongside the decision, the statement issued forward guidance on rates for the first time with the bank declaring that rates would stay at “extremely low” levels for an “extended period”. BOJ Chief Kuroda said that “This will fully counter speculation among some market participants that the bank is heading towards an early exit or an increase in rates,”

The BOJ was obviously taking an extremely careful approach to this meeting given the recent rise in JPY and JGB bond yields over the last week which has seen the bank intervene three times to cap the rise in yields.

However, the bank did introduce one minor change to its monetary policy approach as it announced that it would allow a wider range around its target of zero yields on the 10Y JGB. While Kuroda highlighted that the target would remain zero, he said that the BOJ is willing to ley the yield rise as high as 0.2% while previously it had been enforcing a cap at 0.1%.

Decision Not Unanimous

The decision was not unanimous, however, as two voters on the nine-member policy board dissented with Yukata Harada in particular saying that it would make the target unclear.

Commenting on the motivation behind the move, Kuroda explained that it is meant to allow for more flexibility in daily market movements though was keen to stress that “this is absolutely not aimed at raising rates”.  Furthermore, the BOJ stated that if there as to be any “rapid increase in yields” they would purchase JGBs, clearly reflecting the BOJ’s desire to avoid any sharp rise in yields due to its new YCC target range.

BOJ Targeting Inflation

The move has been interpreted as a more aggressive method of boosting inflation as the bank has now been trying to bring inflation back up to its 2% target for around five years. The last reading of core inflation in June printed just 0.8%, highlighting the extreme difficulties facing the bank.

The BOJ also noted that it would change the balance of its 6 trillion Yen per year ETF buying programme so that a larger percentage was focused on ETFs which map the broader, Topix index which is market-cap weighted. The statement said that the level of the BOJ’s Topix-linked ETF purchases wold increase to 4.2 trillion Yen per year from 2.7 trillion Yen per year prior.

Summary

In all, the moves announced at this meeting will simply give the BOJ some extra breathing room and a little more flexibility around its YCC target. Essentially, the adjustment highlights more the bank’s desire to reduce its policy constraints rather than to move into a tightening stance, which was clear from the messages the bank gave in a bid to dispel rumours or forthcoming rate rises.

Rate Market Implications

Immediately following the meeting, the YO JGB rallied by around 0.03% while the 30Y JGB rallied by around 0.07%. This initial reaction seems reasonable given the nervousness in markets heading into the meeting.

FX Reaction & Technical Perspective

FX Reaction

After surging to fresh yearly highs in the last two weeks, USDJPY has since retreated and fallen back below the May 2018 high of 114.40 which it is now struggling to get back above. JPY buying had been aggressive over recent weeks following the reports earlier in the month regarding a shift in BOJ policy. However, the market has clearly reacted with disappointment now given the rise in USD today. For now, price is challenging the bearish trend line from 2016 highs, if it can sustain a breach of this level, focus will return to a run back up to yearly highs.

 

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