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VIEW: Barclays: Lost Opportunity To Revise YCC

BOJ

Barclays write “we have once again changed our monetary policy forecast with the results of the BoJ monetary policy meeting (MPM) on 20-21 July. We previously forecast that the BoJ would revise its yield curve controls (YCC) at the September (MPM), shortening the target of its controls from the 10-Year to the 5-Year sector in order to increase the flexibility of YCC and thereby boost its sustainability. However, given the subsequent trend in the economy, markets and politics, we now believe a revision is highly unlikely at least until end-2022.”

  • “We believe the hurdle to policy revision could rise with the probability of recession from H222 to 2023. In the absence of a policy revision in 2022, we therefore believe changes could be postponed until H124. The latest Bloomberg survey indicates that most market participants expect revisions toward 2024 or later.”
  • “In our view, the prospects of an early YCC revision have been reduced by three factors: 1) a peaking of the JPY appreciation pressures driven by domestic-overseas yield spreads as yields turn down with the abrupt increase in concerns about economic slowing/recession, especially in the US; 2) a break from the selling pressure on the JPY and JGBs focused on the pro-cyclicality inherent to YCC; and 3) the emphasis on LDP party solidarity and policy continuity with the passing of former PM Abe. Such changes arguably enabled the BoJ to extend the “life” of its current YCC, regardless of whether that was its intention.”
  • “However, we believe the following rationale for YCC revisions remains valid. Concern about “bad JPY depreciation” due to deteriorating terms of trade, though currently subdued, could increase again as real wages continue to trend downward despite the limited pass-through to final domestic prices of the rise in JPY-denominated import prices under yen depreciation. Meanwhile, the decline in the functioning of the JGB market, a side-effect of YCC, has yet to be truly resolved. Also, we believe PM Kishida will seek to differentiate himself from former PMs Abe and Suga in the longer run, putting a greater emphasis on fiscal consolidation and redistribution.”
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Barclays write “we have once again changed our monetary policy forecast with the results of the BoJ monetary policy meeting (MPM) on 20-21 July. We previously forecast that the BoJ would revise its yield curve controls (YCC) at the September (MPM), shortening the target of its controls from the 10-Year to the 5-Year sector in order to increase the flexibility of YCC and thereby boost its sustainability. However, given the subsequent trend in the economy, markets and politics, we now believe a revision is highly unlikely at least until end-2022.”

  • “We believe the hurdle to policy revision could rise with the probability of recession from H222 to 2023. In the absence of a policy revision in 2022, we therefore believe changes could be postponed until H124. The latest Bloomberg survey indicates that most market participants expect revisions toward 2024 or later.”
  • “In our view, the prospects of an early YCC revision have been reduced by three factors: 1) a peaking of the JPY appreciation pressures driven by domestic-overseas yield spreads as yields turn down with the abrupt increase in concerns about economic slowing/recession, especially in the US; 2) a break from the selling pressure on the JPY and JGBs focused on the pro-cyclicality inherent to YCC; and 3) the emphasis on LDP party solidarity and policy continuity with the passing of former PM Abe. Such changes arguably enabled the BoJ to extend the “life” of its current YCC, regardless of whether that was its intention.”
  • “However, we believe the following rationale for YCC revisions remains valid. Concern about “bad JPY depreciation” due to deteriorating terms of trade, though currently subdued, could increase again as real wages continue to trend downward despite the limited pass-through to final domestic prices of the rise in JPY-denominated import prices under yen depreciation. Meanwhile, the decline in the functioning of the JGB market, a side-effect of YCC, has yet to be truly resolved. Also, we believe PM Kishida will seek to differentiate himself from former PMs Abe and Suga in the longer run, putting a greater emphasis on fiscal consolidation and redistribution.”