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#50 - BoJ removes strict YCC cap but continues its negative interest rate policy for now


BoJ decision likely risk supportive but reduces immediate USDJPY downside potential.


In the BoJ's quarterly Outlook Report, the forecast for the core Consumer Price Index (CPI), which measures inflation, was adjusted upward. Specifically, the bank now predicts a year-over-year increase in the core CPI of 2.8% for fiscal year 2023, up from the previous 2.5%, and the same figure for fiscal year 2024, increased from an earlier forecast of 1.9%. The projection for fiscal year 2025 saw a slight increase to 1.7% from 1.6%.


Significantly, the BoJ has chosen to lift its strict cap on Yield Curve Control (YCC), which previously held long-term interest rates at around 1%. Instead, the bank now mentions this figure as a general guide. The BoJ Governor has emphasized that the bank will act flexibly to intervene if the yields on 10-year Japanese Government Bonds (JGBs) rise above 1%.

What does this mean for the markets?

We believe that the BoJ is moving in the right direction with these changes. However, there is still some uncertainty surrounding the end of the Negative Interest Rate Policy (NIRP), which will be crucial to any significant downward movement in USDJPY. Upcoming wage negotiations are likely to have an impact as well, but we'll have a clearer understanding of the situation by the first quarter of 2024.

The recent developments are generally seen as supportive for the risk environment, as they reduce the risk of a sudden spike in US Treasury yields that could result from BoJ policy shifts. Conversely, the projections for USDJPY have become less certain, indicating that a substantial decrease in its value may take more time than previously anticipated. Despite this, our medium-term outlook remains bearish on USDJPY. This is based on the yen being notably undervalued according to our valuation metrics and the expectation that the interest rate differential between US and Japanese 10-year bonds will likely decrease.

Good Luck Team MacrometR No financial advice. For informational purposes only.

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