Goldman: Waning Foreign Spillovers Could Moderate Impact Of Domestic Policy Mix

Goldman Sachs note that “the BoJ’s most recent meeting produced no changes in its monetary policy stance (including YCC), though the bank appears to have turned more optimistic on its inflation outlook, revising up its forecasts for core CPI for the next few years.”

• “Our economists also believe that the Kishida administration’s expectation of the BoJ achieving its 2% inflation target in a “sustainable and stable” manner is indicative of a preference to maintaining a low rate regime, even as it announced a new fiscal package. The proposed central government spending plan has ballooned to levels comparable to the later pandemic-related packages.”
• “The mix of policy - more fiscal expenditures and accommodative monetary policy - is likely to keep the pressure on both the currency, and longer maturity Japanese yields.”
• “Despite this, at current levels, with FX-hedged yields in other major markets no longer looking attractive relative to JGBs, and the yen weakening across most major crosses, longer-dated Japanese bonds could begin to find support as we enter the later stages of the global bond selloff.”