BOJ: Positioning for Steeper H2 Curve

Published on January 20, 2021
SGH Insight
Usually a dull affair, this BOJ meeting will include an important discussion on potentially expanding the band within which it allows 10-year Japanese Government Bonds to fluctuate under its Yield-Curve Control policy from the current +/- 0.2% around 0.0%, to +/- 0.3%.

The proposal, floated in the local press on Monday, led to a small pop up in 10-year JGB yields to 0.05%, but has yet to be confirmed or officially adopted. We believe, based on input from Tokyo, that the expansion of the 10-year JGB trading band will indeed be under consideration at this meeting, but that its formal adoption might not come until the March 18-19 MPM meeting, as part of an overall review of the BOJ monetary policy stance.
Market Validation
(Dow Jones 1/21/21)

BOJ Could Tweak 10-Year Yield Target Range at Policy Review

As Bank of Japan Gov. Haruhiko Kuroda says he is looking for more effective ways to control the nation's yield curve, one option could include widening the target range for the 10-year JGB yield, which is currently set between minus 0.2% and plus 0.2%, according to people familiar with the BOJ's thinking. Mr. Kuroda said Thursday the central bank had no plan to change the overall framework of the yield curve control policy, but would examine the side effects of such measures, including the impact on
market functions, at its next policy-setting meeting in March.

Policy Validation
(National Post 1/29/21)

BOJ drops more hints of bigger yield moves ahead of March review
TOKYO - Bank of Japan policymakers discussed the merits of allowing long-term yields to move more flexibly around the bank's target, a summary of opinions at their January meeting showed, a sign the idea will be a key element of its policy review in March.
As the coronavirus pandemic forces it to maintain a massive stimulus program for a prolonged period, the BOJ plans to announce in March ways to make its tools more sustainable.
"With our monetary easing steps to be prolonged, allowing the 10-year government bond yield to move upward and downward to some extent ... will contribute to financial system stability," said one member, according to the summary released on Friday.
Allowing 10-year yields to move more widely likely won't hurt the economy much, because most money raised by households and companies aren't directly affected by long-term rate moves, another opinion quoted in the summary showed.
The comments are the strongest hints to date that the BOJ will allow long-term rates to deviate further from its 0% target in its March policy review.

While the media and markets focus on the pomp and ceremony surrounding the historic transfer of power to President-elect Joe Biden in Washington today, the Bank of Japan has begun meeting half-way across the globe for the first of its two-day Monetary Policy Meeting on January 20 and 21.

Usually a dull affair, this BOJ meeting will include an important discussion on potentially expanding the band within which it allows 10-year Japanese Government Bonds to fluctuate under its Yield-Curve Control policy from the current +/- 0.2% around 0.0%, to +/- 0.3%.

The proposal, floated in the local press on Monday, led to a small pop up in 10-year JGB yields to 0.05%, but has yet to be confirmed or officially adopted. We believe, based on input from Tokyo, that the expansion of the 10-year JGB trading band will indeed be under consideration at this meeting, but that its formal adoption might not come until the March 18-19 MPM meeting, as part of an overall review of the BOJ monetary policy stance.

Whether adopted now or at the next meeting, we expect BOJ Governor Haruhiko Kuroda will discuss a widening of the band at his post-meeting presser tomorrow, and to frame the change in a more dovish manner as opening the door to driving JGB yields as low as -0.3% should that added stimulus be needed to address the damage to the economy and second wave of the Covid-19 pandemic in Japan.

Our suspicion, however, is that the more likely result of the band widening will be to open the door to a gradual curve steepening and climb in longer end yields as the Japanese economy recovers towards the latter half of 2021, controlled and tightly managed within the BOJ’s YCC monetary policy framework.

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