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Analysts at Nomura explained that when market expectations for BOJ normalization were elevated earlier this year, we had two concerns regarding the BOJ’s communication strategy: 1) its unclear commitment to the 10yr yield target and 2) seemingly over-optimistic inflation forecast.  

Key Quotes:

“The BOJ addressed these two issues yesterday, and we believe the policy framework is now more robust.”

“The changes/tweaks the BOJ made yesterday are likely to have several implications on the market.”

“We believe the BOJ’s inflation forecast has been over-optimistic of late, and thus its credibility with market participants may have eroded significantly. Although the BOJ’s inflation forecast is still more optimistic than that of consensus (and its forecast is likely to be downgraded again in October), once the gap between the BOJ’s forecast and consensus is filled, the BOJ could use the forecast to signal its policy stance in the future. If inflation accelerates more strongly, the BOJ could upgrade its inflation forecast, thereby sending a hawkish sign to the market (and vice versa).”

“We believe the BOJ’s risk of miscommunication declined significantly after the changes it made yesterday. This also lowers the risk of sudden JPY appreciation.”

“For now, the BOJ’s message (downgrade in inflation forecast and “an extended period of time” in the statement) seems clear: it is likely to keep the current low level of interest rates unchanged for a longer period of time than market expected, and it is too early to expect the potential exit of the policy. In our view, it would be difficult for the market to anticipate a near-term 10yr yield hike, before the inflation forecast is upgraded and/or forward guidance is amended.”