BoJ policy adjustment not sufficient to reverse yen weakness

JPY: BoJ further increases YCC flexibility but fails to support the yen

The yen has re-weakened overnight following the BoJ’s latest policy update resulting in USD/JPY rising back above the 150.00-level. The yen has sold off even as the BoJ has outlined steps to further increase the flexibility of yield curve control (YCC). Under the new more flexible framework, the BoJ will no longer strictly cap 10-year JGB yields at 1.0% through the use of fixed-rate purchase operations. The 1.0% rate for the 10-year JGB yield is now only viewed as a “reference”, and the BoJ intends to nimbly conduct market operations below and above 1.0%. It implies that the BoJ will now allow the 10-year JGB yield to rise above 1.0%. The decision to make yield curve control more flexible overnight has already seen the 10-year JGB rise closer to the new 1.0% “reference” level as it hit a fresh high of 0.96%. The initial negative yen reaction highlights that the policy adjustment overnight has disappointed expectations for a bigger shift. There had been some speculation in the run up to today’s meeting that the BoJ could raise the cap for the 10-year JGB yield more clearly by say 50bps up to 1.50%. At the same time, the BoJ remains committed to controlling yields mainly through large scale JGB purchases. The BoJ judged that “with extremely high uncertainties surrounding economies and financial markets at home and abroad, that it was appropriate to increase the flexibility of YCC. But did not want to completely remove YCC so that long-term rates will be “formed smoothly” in financial markets. The BoJ was though concerned by potential large side effects from the prospect of having to  strictly capping long-term rates by fixed-rate purchase operations for consecutive days had they not made YCC more flexible today.

The BoJ’s updated guidance also refrained from providing a stronger signal that they are moving closer to normalizing policy by raising interest rates. Governor Ueda stressed that the BoJ would continue with YCC and negative interest rates until the price goal is in sight. He could not say “whether YCC or negative rates will end first”. The main focus for the BoJ in deciding whether to normalize policy remains upcoming wage negotiations. Governor Ueda reiterated that next spring’s wage negotiation is a key event, and that they want to see how higher wages have been reflected in prices. The BoJ Board members revised up their inflation forecasts (CPI less fresh food) for the current fiscal year and next fiscal year both to 2.8% although the forecast for fiscal year 2025 remained below target at 1.7% helping to justify maintaining loose policy. Overall, the updated communication from the BoJ has done little to encourage  market participants to bring forward expectations for the BoJ to raise rates. The first BoJ rate hike is currently priced for early next year. The only comment that suggested a small step closer to normalizing policy was the one for Governor Ueda when he stated that the “certainty of achieving the price target is rising a little”.

Similar to after the last YCC policy tweak in July, today’s policy update appears unlikely to reverse the yen weakening trend on its own. It will place more pressure on Japanese policymakers to intervene if they want to prevent the yen from weakening further heading into year end. The initial yen weakening reaction maybe somewhat disappointing for the BoJ as Governor Ueda noted that they considered FX in today’s policy decision similar to in July. The BoJ was concerned that maintaining the strict 1.0% YCC cap could have exacerbated yen weakness if they were forced to defend it through larger JGB purchases.     

BOJ IS NO LONGER STRICTLY CAPPING YIELDS AT 1.0%

Source: Bloomberg, Macrobond & MUFG GMR

EUR: Better GDP and inflation data from euro-zone

The recent resilient performance of the euro has continued at the start of this week with EUR/USD rising back above the 1.0600-level. The pair has been rising gradually after hitting a low of 1.0448 at the start of this month. The price action highlights that breaking below the bottom of this year’s tight trading range between 1.0500 and 1.1000 will be a tough nut to crack. One potential trigger for EUR/USD to break below the bottom of the range and retest parity would be if the conflict in the Middle East broadened out, and triggered a sharper adjustment higher in energy prices that hurts European economies’ terms of terms. However, market participants remain comfortable to price in a more contained conflict. The price of oil has actually fallen this month after hitting an intra-day high of USD97.69/barrel at the end of September.

The release yesterday of the latest inflation data from the euro-zone provided further encouraging evidence that the hit to households from last year’s inflation shock is continuing to ease. The release of softer CPI report from Germany, Belgium and Spain yesterday have increased the likelihood that inflation will fall more sharply for the euro-zone as a whole back to 3.0% in October down from 4.3% in September. The downside surprises for national CPI reports were driven both by energy and core inflation. It supports the decision by the ECB last week to pause their hiking cycle. If inflation continues to ease and growth remains weak in the euro-zone, room will open up for the ECB to consider lowering rates next year. At the same time, the release of national GDP reports came in stronger than expected yesterday. They suggest flat growth in the euro-zone is more likely in Q3 rather than a modest contraction.          

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
IT	09:00	GDP WDA QoQ	3Q P	0.1%	-0.4%	!!
NO	09:00	Norges Bank Daily FX Purchases	Nov	--	1200m	!!
EC	10:00	GDP SA QoQ	3Q A	-	0.1%	!!!
EC	10:00	CPI Estimate YoY	Oct	3.1%	4.3%	!!!
US	12:30	Employment Cost Index	3Q	1.0%	1.0%	!!!
CA	12:30	GDP MoM	Aug	0.1%	-	!!!
US	14:00	Conf. Board Consumer Confidence	Oct	100.5	103.0	!!

Source: Bloomberg