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Since media reported on the possibility of BOJ mitigation measures at the next meeting, market expectations of BOJ normalization have been recovering, according to Yujiro Goto, Research Analyst at Nomura.

Key Quotes

“Our BOJ normalization expectation index has risen aggressively, reaching its highest since late January. Market expectations for a possible policy tweak by the BOJ have recovered sufficiently.”

“While market reactions were likely not welcomed by the BOJ, the efficacy of the fixed price operations was again confirmed well yesterday.”

“After the introduction of YCC, 10yr JGB yields have been less sensitive to the amount of BOJ’s JGB purchases, and we estimate the termination of YCC could appreciate JPY by 3-5%. The median expectation among BOJ watchers of the size of JPY appreciation when the BOJ raises yields was also 5%, according to a Bloomberg survey.”

“Any new forward guidance to point toward more scope for 10yr yields to rise would risk eroding the credibility of YCC but, as long as the fixed price operation is effective, upside risks of 10yr yields can be limited (and thus upside risks of JPY). Then, the JPY weakness trend can sustain after the short-term appreciation. It is crucial for the BOJ to maintain the credibility of the YCC framework to avoid further adverse market reactions.”