VIEW: Goldman: Back to a Waiting Game, Next Step Could Be Removal of NIRP

Goldman Sachs think the decision to “widen the 10-year yield band aimed at improving the bond market functioning may be the last action taken by the BoJ in this regard. Yields can fluctuate by 100bp in total and any further widening would undermine the rationale for a 10-year yield target of 0%.”

• “We therefore believe that the next policy decision the BoJ takes will likely be a major one - such as changing long-/short-term policy rate targets or terminating YCC altogether - and this will depend on the risk of global economic slowdown in 2023 that both the government and BoJ have cautioned against, and whether the 2% inflation target can be achieved in a sustainable and stable manner (or whether achievement of the target will come into sight). With regard to the latter, we continue to see the prospect of the achievement as very poor in 2023, and we thus think the BoJ will start afresh following the latest widening action, keeping a close eye on data points as it goes back to playing a waiting game (maintaining YCC) during 2023.”
• “However, whatever the motives behind its latest move, the BoJ's greater emphasis on the need to enhance the JGB market functioning suggests to us an increased likelihood that it will abandon the negative interest rate policy (NIRP) from the perspective of strengthening the sustainability of YCC, similar to its latest action.”