BoJ YCC Impact & Market Implications

Bottom-line: The process to normalizing YCC continues and will take weeks if not months to fully be reflected in all markets (Local and Foreign)

• BoJ YCC Policy Update: The target range for the 10yr JGB remains at +/-50bps but the fixed-rate operations move to 1%
• Price discovery: Ongoing debt financing needs plus a wider YCC naturally helps price discovery and drive yen rates up
• Demand for US assets – Part 1: please avoid over-simplifying how demand for foreign assets from Japan will change
• Demand for US assets – Part 2: HIGH 3M Annualized FX Hedging Cost tracking level of Federal Funds Rate a big hurdle
• Demand for US assets – Part 3: On a fully FX adjusted basis, US bonds are not attractive from a Japan investor standpoint
• Global Macro Impact: If the era of easy money is truly coming to an end, higher term premia should steepen curves
• Foreign investors considerations: meanwhile Higher JGB rates can help drive overseas flows back to Japan FI markets

Please see the attached PDF slide deck for the full write-up on these concepts and more with charts…