BoJ Tweaks YCC, Yen Weakens

Still more to come....

Author

Tim Vollans
October 31, 2023 • Estimated Reading Time: 5 minutes

Japan’s central bank did something, but it wasn’t enough for the yen…

To understand what they did, take a look at the red line:

There’s no red line any more. Figurative & symbolic.

The BoJ removed the hard 10y yield cap at 1%, while retaining the optionality to intervene and maintain ‘order’ if the market gets too far out of line.

Commentary & focus has centred on the yen response, so we’ll quickly cover that first before moving on to the bigger picture.

It’s all related anyway…

Why the yen weakened

Here’s what we said in Ueda Vs Yellen:

Even if there’s no policy hint, the BoJ is set to revise up their inflation forecasts on October 31st.

More JPY Weakness?

If this isn’t accompanied by a policy hint or tweak, there’s a good chance the JPY will weaken further.

Monetary policy becomes even more accommodative if inflation continues to rise without a BoJ response.

Telling the market that there’s no longer a cap at 1%, (but there still might be if we decide things are moving too fast) doesn’t qualify as a significant policy change.

And they DID revise up those inflation forecasts. Headline CPI expectations for 2024 went from 1.9% to 2.8% (!)

Hardly runaway inflation, but definitely above target. 2025 next?

If the next set of forecasts are updated to see inflation above 2% in 2025, then surely the target will be seen as met, but there’s more going on before that.

For now though, the BoJ just isn’t allowing themselves to believe.

Main reasons for inflation outlook overshoot compared to July are longer-than-expected effects of price pass-through and rising oil prices… But we are not in a situation to foresee sustainable and stable price increases

Governor Ueda

Even though they’re upgrading inflation forecasts and think economic growth will be higher in 2024 too.

IT MAKES NO SENSE

Only if you think about it logically. All the clues are there. This probably isn’t transitory guys.

I guess after 30 odd years of deflation & lowflation you can see why it might take them some time to come around to the idea.

Nevertheless, markets took the hint. Yields rose.

If we take the 2 year as a proxy for rates 2 years from now, we’re at 15bps, 25bps above the current policy rate:

And the 10 year is closing in on that 1% level too.

Ueda still says he doesn’t want to believe…

Pretty sure he’ll be wrong on that one.

It’s (still) all about wages and prices

The virtuous cycle is taking shape.

See, it’s all well and good saying that wages need to rise, but there’s a constraint on that.

Can companies afford to hike wages?

Absolutely!

Goldman says:

  • Consensus is for upper single-digit (%) profit growth

  • 2Q results likely to yield positive surprises

  • We expect large upward revisions to full-year guidance

  • Favourable earnings should provide a tailwind for the stock market

On some of the individual names, upward revisions to forward guidance is a huge understatement (thread):

Rounding off, all the conditions for exiting easy policy are likely to be met in the near future.

There’s uncertainty about 2025, which is understandable, but the wage negotiations will matter most, and they’re coming way sooner.

Every meeting is live: