BOJ Decision Largely As Expected, Futures Pare Losses

JGB futures spiked sharply higher early in the Tokyo afternoon session after the BOJ left policy unchanged at -0.1% in a unanimous vote. However, it has subsequently unwound that move.

• JGB futures re-opened, spiking to 144.24 from the lunchtime level of 143.88, -36 compared to settlement levels. Earlier, JBZ3 hit 143.57. It is currently 143.86, -39 compared to settlement levels.
• The BOJ has also maintained the upper limit of the Yield Curve Control (YCC) at 1%. This decision drew significant market attention, especially in light of overnight Nikkei headlines that suggested the BOJ might consider adjusting the YCC framework. However, it's noteworthy that the BOJ now labels the upper limit as a "reference." The concept of a 1% upper boundary being regarded as a "reference" implies the possibility of allowing it to slightly exceed 1%, though the extent of flexibility the BOJ has introduced remains subject to debate. We'll need to monitor the BOJ's interventions to determine how far they are willing to let it rise.
• In summary, the decision aligns with general expectations. It involves a minor adjustment in the wording to provide room for flexibility regarding the upper limit for long-term yields while maintaining its accommodative monetary policy stance.
• The cash JGB curve has retained its bearish steepening in post-BOJ trading, but the yield rises have been pared. Yields are 1.9 to 4.7bps higher across benchmarks. Notably, the benchmark 10-year yield is at 0.932% after reaching 0.963% earlier, a new cycle high. At lunch, it was4.2bps higher at 0.936%.
• The swaps curve has maintained its bull-flattening, with rates 0.6bp to 4.4bps lower. Swap spreads sharply tighter across maturities.