MNI BoJ Preview - July 2023: Holding Steady, Inflation Outlook Key

EXECUTIVE SUMMARY

• Our analysis aligns with the prevailing consensus, which anticipates that the current easing policies will be maintained during this week's meeting. Market expectations also appear fairly low, with the 10yr JGB yield below the upper bound of the -/+0.50% permissible range, while the 10-yr Swap/JGB spread (which can be thought of as a proxy for BoJ YCC tweak speculation) sits around +15bps currently, not too far off multi-month lows going back to last August 2022.
• This is likely to leave the focus on the inflation outlook. The FY23 forecasts are widely expected to be upgraded, but there is less certainty as to how the FY 24 and FY 25 forecasts evolve.
• October is seen as the more likely window, according to economics consensus for a YCC shift. It's important to consider that BoJ officials have acknowledged their reluctance to signal the timing of any policy changes in advance. Hence, if the BoJ were to surprise the market, we believe it could take one of two possible actions: either widen the trading band around the 10-year target of 0% or shorten the tenor of the YCC target to 2-5-year JGBs. While both scenarios are possible, we assign a higher probability to the latter.
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