Futures Sharply Lower As BoJ Effectively Widens YCC Band

JGB futures are just off session lows, -125 compared to settlement levels, after the BoJ's decision to maintain the policy balance rate at -0.1% and the 10-year JGB target at about 0% but adjust YCC to be flexibly managed.

• In effect, the BOJ said that the +/- 0.5% range around 0% in the 10-year JGB will be a “reference, not a rigid limit”. However, there will be a strict yield cap for fixed rate operations at 1.0%. That effectively makes the band the 10-year JGB can trade in much wider than anyone expected.

• Amidst a strong consensus leaning towards no policy change, echoing recent statements from BOJ Governor Ueda, the BoJ has adhered to the principle of not indicating the timing of any policy adjustments beforehand, as previously acknowledged by officials.

• The BoJ’s reasoning for this change is to “enhance the sustainability of monetary easing under the current framework by conducting yield-curve control with greater flexibility and nimbly responding to both upside and downside risks to Japan’s economic activity and prices.”
• Cash JGBs are 0.1bp to 13bp cheaper with the futures-linked 7-year zone leading. The benchmark 10-year yield is 10.5bp higher at 0.554%, above BoJ's YCC (now soft) limit of 0.50%.
• The swap curve has bear steepened with rates 0.1bp to 12.0bp higher. Swap spreads are wider apart from the 7-year.
• On Monday the local calendar sees Retail Sales, Industrial production, Consumer Confidence and Housing Starts.