BoJ sticks to its yield curve control strategy

The Bank of Japan stuck to its monetary policy at today’s (17 June) meeting, maintaining current short-term policy rates at -0.1% and long-term rates at around 0%.

The BoJ’s new strategy of offering daily, unlimited fixed-rate JGB purchases had been working to defend the +/-0.25% range for 10yr JGB, with purchases lower than previously. Earlier this week, however, the BoJ bought a larger amount, showing its determination to protect the range.

What you will learn:

• Meanwhile, ultra-long yields have been trending higher. We think this reflects an increase in supply, in addition to rising global yields. We expect that steepening pressure from the long end will calm down in H2 as the supply-demand balance improves.
• The April CPI rose to 2.5% y/y – the highest rate since 2008 excluding VAT-induced spikes. Given the large declines in the yen since end-February and the lag in currency pass-through, core-CPI will likely rise higher in H2. Still, we don’t forecast sustained inflation, and expect wages to stay flat.
• We see little chance of the BoJ adjusting its yield curve control strategy given high inflation will prove temporary and muted concerns about policy sustainability. A new communication strategy introduced in April also means we generally don’t expect the 10yr yield to stay above 0.25%.