Japan: What the BOJ can do? – Nomura

Yujiro Goto, Research Analyst at Nomura, suggests that the next BOJ meeting on 30-31 July represents interesting event risk for Japan trading and the market interest in the July meeting has risen, sending JPY, volatility and JGB yields all higher.

Key Quotes

“The BOJ needed to announce the fixed price JGB purchase operation to buy an unlimited amount of 5-10yr JGBs at 0.11%.”

“While media reports so far indicate the BOJ is mulling measures to alleviate the negative side effects on financial institutions, an actual decision at the next meeting is unclear.”

“In the short term, JGB yield volatility is likely to recover, as the market needs to judge the BOJ as more serious about alleviating negative side effects.”

“USD/JPY has been more sensitive to JGB market volatility and expectations of BOJ policy normalization and/or tweak would exert downside pressure on USD/JPY. The recently accumulated JPY short positions would likely be unwound for now.”

“At the same time, we still assign a lower likelihood to the BOJ officially raising its 10yr yield target higher at the July meeting, as such a move would be difficult to explain as different from policy normalization when inflation slows.”

“Thus, to avoid any market misunderstanding, the BOJ will likely consider just adding guidance suggesting 1) a wider range for 10yr yields around the current target of 0.0% without changing the target or 2) preparedness to allow for a rise in 10yr yield when inflation eventually recovers.”

“This guidance, if added in the statement at July meeting or later, would be short-term positive for JPY, as JGB market volatility would likely stay higher than before.”