Expectations for the BoJ meeting tonight were for no change (and perhaps lowering its inflation and growth outlooks) and markets were braced for a whole lot of nothing with overnight USDJPY vol at its lowest of the year (for a BoJ meeting). Sure enough that is what they got. "No change" across anything policy but cuts to inflation expectations (as well as warnings of a downside skew for growth) left the yen slightly higher.
- Bank of Japan Keeps 10-Year JGB Yield Target About 0%
- BOJ Maintains Policy Balance Rate at -0.1%
- BOJ Board Votes 7-2 to on Neg Rate
- BOJ FY2017 Core CPI Forecast Is 1.5%; Prev. Forecast 1.7%
- "With regard to the risk balance, risks to both economic activity and prices are skewed to the downside."
- BOJ isn't seeing any near term turnaround for exports. Says sluggishness is expected to remain "for some time."
There was some chaos in Nikkei Futures ahead of The BoJ…
Since The BoJ unleashed its curve-management plan, things have been oddly stable…
While Yen has weakened around 4 handles…
Banks have gone nowehere…
As the yield curve has remained relatively flat…
And managing 10Y yields appears to be holding for now…
But while levels/prices may look stable, as Goldman notes, JGB market functionality has already deteriorated and we expect it to continue to deteriorate under the yield curve control, as long as the BOJ continues with the current monetary policy.
Bond market functionality has been deteriorating even prior to the introduction of yield curve control in late September. In the BOJ’s bond market survey, the DI for bond market functionality deteriorated to -46 in August 2016, as compared to -25 in February 2015, when the survey first started (see Exhibit 3). Deterioration in the DI was particularly noticeable after the adoption of the negative rate policy.
Exhibit 3: DI on Bond market functionality
Source: BOJ
With the addition of 10-year JGB yield control on top of the negative interest rate policy, we expect long-term rates to become more “fixed” and market functionality to decline even further. Already, on October 19, an entire day went by with no transactions made in newly issued 10-year JGBs (according to the Japan Bond Trading Co.). This is the first time in 13 months, since September 24, 2015, that no transactions have been made for an entire day.
We believe that the BOJ is also concerned about impairment of JGB market functionality, in that it may potentially cause large stress in the market when the BOJ decides to raise its policy rates in the future. We see little way to get around this issue, however, as long as the BOJ maintains current monetary policy.
