Japan’s YCC to face its toughest challenge yet

The precipitous decline of the Yen to record fresh lows (and briefly above 150 last month) coupled with a dramatic surge in energy prices has resulted in above-target headline (2.9%) inflation, as well forty-year highs in survey-based inflation expectations.

What you will learn:

• The BoJ is sticking to its guns for now, arguing that inflation above 2% is transitory, but we think markets will keep testing the BoJ’s Yield Curve Control policy
• Our base case is that YCC is likely to hold in the near term and therefore remain tactically bearish on the Yen for the next couple of quarters. Further out, we are neutral as there is a higher probability that YCC may be relaxed if there is an improving external environment, most likely in the form of a definitive pause in the Fed’s hiking cycle.
• Still, we do not think that even repeated FX interventions can stop the direction of travel for the Yen if global policy rates continue their relentless rise.