Bank of Japan (BoJ) preview: framework review in focus

BoJ framework to suggest easing for longer

The consensus expectation continues to see the Bank of Japan (BoJ) hold monetary policy unchanged with policy rate at -0.1% under the negative interest rate policy (NIRP) while yield curve control (YCC) finds the ten-year Japanese Government Bonds (JGBs) yield target maintained at around 0.00%. That said, the March meeting that ends on Friday 19 March, also marks the conclusion of their three-months long review of the current framework and changes here could see to the market reacting consequently.

Triggering the latest interest to review the BoJ’s policy framework had been the sustained missing of the BoJ’s 2% inflation target with the situation having only further deteriorated following the Covid-19 pandemic. At the same time, the pandemic had also placed visible stress on the Japanese economy, rendering the need for the BoJ to ensure better effectiveness of the monetary support for longer. As a result, BoJ governor Haruhiko Kuroda had promised a review of the policy though without a total overhaul expected.

Specifically, the BoJ is noted to be looking at the central bank’s asset purchases and yield-curve control (YCC) management. Greater flexibility with exchange traded fund (ETF) purchases reacting to the needs of the Japanese economy may be reflected in the review. However, it is the YCC management review here that may pack the surprise for the market and corresponding market reactions.

BoJ Kuroda had previously expressed that he saw no need for the widening of band of the 10-year yield target, currently set at around 0.2%, or 20 basis point (bp), from zero. That said, members had also suggested otherwise, particularly given the potential of a wider band relieving the stress for financial institutions and during a time when sovereign bond yields around the world have climbed. Therefore, this makes the YCC management update a wild card here for the March BoJ meeting.

USD/JPY moves remain subjected to yield differentials

The Japanese yen can be seen trading at a fresh nine-month low against the US dollar in recent sessions, with USD/JPY elevated at above 109 ahead of both the Federal Reserve (Fed) and BoJ meetings this week. This was as the yield differentials between US ten-year yields and ten-year JGBs rose to an over 1-year high and may continue to find the gap widening.

The BoJ meeting will be the most watched item next to the Federal Open Market Committee (FOMC) meeting in driving the moves here for the pair. In the off chance that the widening of the ten-year JGBs yield target band is seen, that could potentially ease some pressure for the yen against the greenback. On the other hand, should the Fed be again viewed to shrug off the rising bond yield pressures and go to the extent to suggest any shift in stance, that could spook the market and send US Treasury yields further soaring. In any case, expectations that the UST yields have yet to exhaust their upside potential amid the global economic recovery may see USD/JPY retaining an upward bias in the medium to longer term.