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Analysts at Scotiabank explained that policymakers have consistently expressed concerns relating to the BoJ’s accommodative stance and specifically YCC control policy, given the unintended consequences of their actions and the challenges posed to the financial sector.  

Key Quotes:

“The BoJ is said to have been conducting investigations into the side effects of their policies however the findings are unlikely to warrant an outright shift in terms of direction.”

“Improving fundamentals may allow for a modest recalibration in the BoJ’s tone, given the material improvement in wages and continued decline in the unemployment rate.”

“However, developments on the inflation front have been extremely disappointing and any premature steps toward normalization would likely frustrate the BoJ’s progress toward its 2% inflation target.”

“Market participants’ focus has centered on the YCC policy and the possibility of an upward adjustments to the JGB 10Y yield target of 0%. This week’s actions appear to be at odds with the rumors, given that the BoJ stepped in with two fixed-rate bond buying operations offering to purchase an unlimited amount of 10Y JGBs at a yield of 10-11bpts. These operations are a core component of the YCC policy introduced in September 2016 and their recent use should serve to dampen expectations for any near-term adjustments.”

“Market sentiment and positioning appear to be at odds with each other. Weekly CFTC data detailing speculative futures positions are showing a relatively large JPY net short reflecting sizeable bearish positions added over the past 5 weeks. A good portion of the latest JPY strength likely reflects an adjustment and liquidation of some of the newly established shorts.”