The yen continued to depreciate this morning. Its weakness was triggered by the Bank of Japan’s decision to make its 10-year JGB yield target more flexible and introduce a forward guidance – which is, strictly speaking, unnecessary, as everybody who looks at Japanese inflation figures and expectations will know that rates will just have to stay at their current low levels for an extended period of time if the Bank of Japan seriously means to push inflation up to 2%. Overall, I therefore do not agree with some analysts who believe that the BoJ’s statement is a major dovish signal and marks the bank’s deviation from the global trend towards a more restrictive monetary policy in order to weaken the yen. I rather think that yesterday’s announcement of keeping 10-year JGB yields below 0.2% in the future (instead of below 0.1%) raises the risk of another amendment to the yield target in the near future. If the target became even more flexible, JGBs might trade at similar levels to those seen for Bunds at the beginning of July. This would render JGBs more attractive and result in a yen appreciation.
Why do I think so? I do not see how a more flexible yield target will help the BoJ to reach its inflation target. Instead, I am concerned that relief for the banking sector was one major reason for yesterday’s decision. The fact that the BoJ yesterday reduced the volume of bank deposits which are subject to a negative interest rate points in this direction, too. In addition, the BoJ discussed in spring whether an excessively low interest rate level might actually be detrimental if it increased the pressure on bank margins and thus weighed on lending (“reversal interest rate” theory). This might mean that the BoJ is not willing to continue its ultra-expansionary monetary policy forever. And if the market begins to speculate on this assumption, the BoJ might have laid the ground for JPY strength with yesterday’s decision. As they say, well meant is often the opposite of well done.
Why do I think so? I do not see how a more flexible yield target will help the BoJ to reach its inflation target. Instead, I am concerned that relief for the banking sector was one major reason for yesterday’s decision. The fact that the BoJ yesterday reduced the volume of bank deposits which are subject to a negative interest rate points in this direction, too. In addition, the BoJ discussed in spring whether an excessively low interest rate level might actually be detrimental if it increased the pressure on bank margins and thus weighed on lending (“reversal interest rate” theory). This might mean that the BoJ is not willing to continue its ultra-expansionary monetary policy forever. And if the market begins to speculate on this assumption, the BoJ might have laid the ground for JPY strength with yesterday’s decision. As they say, well meant is often the opposite of well done.
2
may be the move comes in 30 mins