Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
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Bank of Japan’s ultra-dovish stance opens the door for further yen weakness
APAC Research
Summary: Bank of Japan has raised the bar of its dovishness with “daily” bond buying to cap yields at 0.25%. As the policy divergence theme remains top of mind for investors, the resulting yen weakness is only a start and the doors for USDJPY to reach 135 have been opened. On watch will be the Fed’s May 4 meeting and the concurrent move in US yields.
Not that we had any doubts about the Bank of Japan’s (BOJ) dovish stance, but the central bank managed to still give us a dovish surprise. While the 10-year JGB yield target was maintained at 0%, the central bank doubled down on defending the 10-year bond yield target at 0.25%. The BoJ said that it will continue purchasing unlimited JGBs every single business day in fixed-rate operations. This is despite the central bank raising its FY 2022 (year ending March 2023) core inflation estimate to 1.9% from 1.1% earlier.
It then expects inflation to moderate to 1.1% in FY 2023 and 2024, a sign that it sees current cost-push price rises as transitory. Also, BOJ’s hope is that stimulus measures will enable a recovery in the Japanese economy (which is a contrast if you consider that the bank has cut its GDP forecast for FY 2022), eventually spurring some wage growth which would fight out the squeeze in disposable income. Ahead of the July elections, political pressure for capping inflation is at the forefront too, as our colleague John Hardy noted here.
We see little reason to believe that wage inflation will counter the risks of higher price pressures, and a weaker yen as a result of this dovish policy will only exacerbate imported price pressures. Higher prices could erode consumer sentiment and hurt business spending. April core inflation, which is due to be reported on May 20, is seen rising towards the central bank’s 2% target on the back of rising energy and food prices.
The BOJ decision today has reinforced its ultra-dovish stance, a huge contrast to the global tightening push. What this means for the yen is obvious – more weakness to come. USDJPY rose by over 1% on the announcement to fresh 20-year highs and broke the psychological level of 130. The impact was seen across yen crosses, as well as over in Asian FX. USDCNH broke above the psychological 6.60 level again to near six-month highs of 6.6524 as PBOC’s dovish policy also came into the focus.
The BOJ confirmed that USDJPY at 130 was not a line in the sand, and it is only a matter of time before we move towards 135. Focus for the yen will remain on the US treasury yields, and we are entering a pivotal week for that with the Fed likely to go for its first 50-basis point rate hike on May 4 along with quantitative tightening. Verbal intervention from Japanese authorities may be seen, and the ball is in the court of the Ministry of Finance for any actual intervention should the move in USDJPY become rapid.
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