Japan - Kuroda's Christmas surprise

Japan Macro: BoJ suprises with early shift of YCC framework.

This morning, the Bank of Japan surprised friend and foe by shifting its Yield Curve Control (YCC) framework much earlier than expected. While leaving its policy balance rate and 10-yr yield target unchanged for now (at -0.1% and 0.0%, respectively), the BoJ announced to widen the trading band on 10-year bond yields and raise the upper limit of the band to around 0.50%, from 0.25%. Consensus expectations including ours was for the Bank of Japan to keep its monetary policy broadly unchanged the coming months, following repeatedly dovish comments from Chairman Kuroda whose second and final term expires in April 2023. Remarkably, many BoJ watchers did not expect any monetary policy change at all for the foreseeable future. We anticipated the first twist in the BoJ’s monetary policy to come in Q2-2023, just after Kuroda’s departure, including a modest increase in the policy balance rate and the BoJ allowing a gradual move of the 10yr yield band towards 0.50%. The fact that the BoJ has once more surprised financial markets is not new: earlier unexpected moves have contributed to its reputation that the Japanese central bank intends to surprise markets from time to time rather than being a textbook example of delivering forward guidance. At the time of writing, the Japanese 10-year bond yield jumped by 15 bp to around 0.40%.

… feeding a further comeback of the yen

The BoJ’s surprise move triggered the yen to rally by more than 3% versus the US dollar and the euro. Indeed USD/JPY dropped from 137.30 to 132.54 and EUR/JPY from 145.63 to 140.63. The uptrend of the US dollar versus the yen has now also come to an end, with the breaking of the 200-day moving average in USD/JPY.  We expect more upside in the yen versus the US dollar, mainly because of the rate cuts by the Fed we foresee to start end of 2023. Our end-of-year forecasts for USD/JPY currently stand at 132 for 2023 and 125 for 2024.