BofA: MoF Intervention Or BoJ Policy Change? Bias Remains Short JGBs & Short JPY Vs. USD

Bank of America write “in June, we argued that Japan would respond to yen weakness by the BoJ's policy tweak. As the BoJ tweaked YCC at the Jul MPM, we argued that the MoF would manage FX volatility until the BoJ's Oct MPM. Now, the risk of the MoF's FX intervention relative to the BoJ's policy tweak has risen further, due to elevated volatility in U.S. rates.”

• “We argue that an attempt to support JPY by raising yen rates, especially the 10yr rate as a front-end hike appears premature, could be costly as it may require QT, risks destabilizing the JGB and global bond markets, and could face political resistance for its implications for public debt sustainability.”
• “Until U.S. rates volatility subsides, Japan's policymakers would have to mitigate yen and JGB weakness by utilizing FX intervention and additional bond purchases, which may send a mixed signal to the market.”
• “Short JGB and JPY vs USD continues to be the trade for Japan for the rest of 2023, in our view.”