“The Bank of Japan will review the side-effects of its monetary easing at next week's policy meetings and may take additional steps to correct distortions in the yield curve, the Yomiuri newspaper reported on Thursday.” (REUTERS)
Bank of Japan Meeting and Policy Change
The BoJ will review its policy at Wednesday's meeting after last month's tweak in its bond yield control policy which allowed bond yields to rise from 0.25 to 0.5%. There is a chance the BOJ will once again "surprise" the market with yet another YCC tweak. The news has already seen a surge higher in the yen as the Bank of Japan intervened in the market to keep bond yields down.
Bank of Japan Intervention
On Thursday, the Bank of Japan spent a record ¥4.6 trillion ($35 billion) on its various bond-buying operation as yields stayed at the upper end of the trading range. The amount surpassed a previous record high of ¥2.21 trillion set on June 14. Making intervention so far $150 billion in just 3 weeks and this figure will have increased on Friday.
The surge in yields can be seen in the 10Y Yen Swap which is trading above 1.00%.
Longer term view of Goldman Sachs in relation to Japanese Bonds
The cost of intervention is huge as we can see on the chart below and unsustainable.
The anticipation of higher rates In Japan can be seen in the widening gap between US 10-year bonds and the JPY and the gap between the two has widened out.
Yield Curve Bank Of Japan Loosing Control
“The YCC peg which as of this moment no longer exists and is, at best, a moving target which may (or may not) move to 75bps or more next week - nobody really knows, which is why everyone is selling first and asking questions later; and until the market finds out what the new bogey is, it will keep dumping JGBs and forcing the BOJ to intervene with unlimited - and unscheduled - bond-buying operations.” (ZEROHEDGE)
The problem for the Bank of Japan is the cost of intervention is huge and won't work long-term and if they adjust the YCC to say 0.75% as a cap on bonds the market is still likely to dump JGB’s and the Yen will soar higher. The Bank of Japan faces seeing yields rise at the same time as other central banks that have been hawkish are looking to slow or conclude tightening. If they try and defend the cap the market will continue to test the BoJ's resolve. Whatever the BoJ do the Yen looks set to move higher longer term.
We would also agree with this view: “A 20-year regression of USD/JPY against the 5-year US/Japanese yield spread would suggest ‘fair value’ is 118 now, and given the tendency to overshoot, it’s more than a little tempting to conclude USD/JPY 115 is a reasonable target. Even if the BoJ meeting on Wednesday only tells us (say) that they will announce the outcome of their review of the changes they made to yield curve control, in due course!” They add:
“I think YCC has had its day because it now has a target on its back. That may, before we’re done, cause an overshoot in USD/JPY to the downside. For now, though, we like buying into Yen's weakness, so we’ll wait and see if the BOJ disappoints bulls enough on Wednesday to deliver attractive entry levels.” (SOCIETIE GENERALE)
"Fewer JGB purchases would have only been the result if the BoJ could have illustrated credibly that 0.50% was going to be the limit in perpetuity. As it did not do that, it has now achieved the opposite of what it stated as its motivation. That means there are only two possible interpretations: either its motivation was a different one: the beginning of the end of its ultra-expansionary monetary policy. Or the Japanese central bankers have so little understanding of the market that one has to assume they were born yesterday.” (COMMERZBANK)
Large hedge funds have a large yen position at present which could see a correction in the short term but this will allow position traders to get in with favourable risk to reward on a bounce if it unfolds. The JPY is going up long term in our view and any dips are buying opportunities.
As Zerohedge Point out: "The BOJ can have a strong yen or bond market stability but not both at the same time." they will have to face a strong Yen and it could get a lot stronger than they want. This week's Bank Of Japan meeting will be the most important in years for the Yen and also global financial markets.
Below are monthly and daily charts of USD/JPY with the key levels of support and resistance to watch - we have a strong downtrend and expect continuation.
2022 seek to slow and stop rate rises which will see the Yen move sharply higher which they don’t want.