VIEW: SocGen Conduct Scenario Analysis Re: The BoJ

Societe Generale note that “the BoJ purchased unlimited amounts of government bonds at a fixed yield several times this week. It must now make a difficult decision given rising interest rates and the yen depreciation. Four points are important to consider regarding the BoJ's 2022 and 2023 monetary policies after this unlimited bond-buying, i.e. whether: 1) U.S. interest rates remain at the Fed's longer-run Fed Funds rate forecast of 2.375% or increase to 2.75-2.875%; 2) Japan's current account remains in the red after February data; 3) Japan's core CPI exceeds 2.5% after April data; and 4) the government's economic measures become large-scale, prompting the issuance of deficit-financing bonds.”

• “We have established the following three scenarios for the BoJ's policies, based on USD/JPY and core inflation.”
• “Scenario 1: if USD/JPY does not exceed Y130 and core CPI does not exceed 2.5% after April, the BoJ maintains the current monetary policies under Governor Kuroda. However, even in this scenario, the bank could expand the range for the 10-Year yields under a new Governor who will take office next April.”
• “Scenario 2: if USD/JPY exceeds Y130 but core CPI does not exceed 2.5% after April, the BoJ relaxes its stance to keep the 10-Year yield below +0.25% with unlimited bond-buying under Governor Kuroda.”
• “Scenario 3: If USD/JPY exceeds Y130 and core CPI exceeds 2.5% after April, the BoJ expands the range for the 10-Year yield under Governor Kuroda.”
• “Scenario 1 is our core scenario. However, for now, under any scenario, given it will be difficult for prices to rise by rising wages for the time being, we do not expect the BoJ to raise policy rates (0% target for the 10-year interest rate and policy balance rate of -0.1%) not only under Kuroda but also under a new Governor.”