BOJ’s surprise move unlikely to mark start of tightening cycle

We doubt the surprise move from the Bank of Japan to expand the tolerance range for 10-year JGB yields to +/-0.50%, from +/-0.25%, marks the start of a tightening cycle. Rather, we think the move signals the BoJ’s commitment to maintain the yield curve control (YCC) framework and that the BoJ accepted the effective tightening as necessary cost to make YCC policy more sustainable.

What you will learn:

• BoJ explained that today’s move was to enhance the sustainability and effectiveness of YCC policy, by encouraging more smooth yield curve formation. We believe this is not a beginning of tightening despite rising speculations that the BoJ is heading towards exit amid high inflation.
• We realized that BoJ had been very uncomfortable about the deterioration in JGB market functioning and the associated excessive burden on the FX rate to absorb all the shocks. However, we had expected that the BoJ would move more cautiously to add flexibility to YCC policy in order to avoid effective financial tightening and financial disruptions, and had thought that widening the tolerance band at this moment was unlikely.
• It appears that the BoJ decided to accept the effective tightening as a cost to make YCC policy more sustainable. To avoid a sharp yield hike, BoJ decided to continue offering a daily unlimited fixed rate long term JGB purchases.