Status Quo Likely, But Position For Possible BoJ Surprise

Goldman Sachs expect “the BoJ to maintain the status quo on all policy parameters at this week’s meeting.”

• “That said, some possibility of a surprise policy tweak before the end of the year remains given the sharp Fed pivot.”
• “To the extent the decline in global yields have made the YCC constraint less likely to bind (we have revised lower our 10y JGB forecasts to 0.90% by end-2024), it is possible the BOJ sees an opportunity to remove YCC entirely to provide greater flexibility on the sequencing of policy adjustments down the track.”
• “The difficulty would be in the communication - we suspect removing YCC would lead to an even more aggressive pull-forward of NIRP exit expectations, which the BOJ would want to avoid at this point.”
• “Of course, contrary to our expectations, the bank could also directly make adjustments to NIRP.”
• “In either scenario, we could see upward pressure on longer maturity JGB yields; given current levels, the risk/reward on shorts appears attractive - even if there isn’t a surprise at this week’s meeting, the potential for future adjustments should keep the downside limited, and we do expect yields to drift higher over the course of the next year.”
• “Therefore, we recommend shorting 10y JGBs on an outright basis.”