Goldman Sachs note that “the confluence of JGB yields again approaching the top end of the BoJ’s tolerance band and USD/JPY breaking above Y122 has raised speculation around potential BoJ and MoF responses. Recent commentary from Japanese government officials appears to show some discomfort with the rapid movement in the JPY, and our economists had previously indicated that USD/JPY approaching the Y120 mark could increase the odds of other potential JPY-related policy guidance. However, we think the easier steps, such as the verbal interventions in 2015, are unlikely to be effective. The central bank will also have to balance still weak domestic activity levels and below target inflation against the backdrop of rising commodity prices and more hawkish central bank pivots globally. 10-Year JGBs touching levels that last saw the BoJ conduct fixed rate operations have created an added challenge, as while further fixed rate operations could be used to keep 10-Year JGBs from exceeding the upper end of the tolerance band on further extensions of the global sell-off, it would be at cross-purposes with checking JPY depreciation. For now, our economists don’t expect any major policy recalibrations over the remainder of Governor Kuroda’s term if the drift in yields/currency is gradual. However, continued pressure on yields and the JPY could see markets start to price increased risk of potential recalibrations to yield curve control that we’ve highlighted previously (such as another widening in the tolerance band or shortening in the maturity target from the 10-Year to 5-Year point).”
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