BoJ tweaked current policy voting in favour 7-2 - TDS

Research Team at TDS, suggests that the market was in lockdown mode ahead of today’s BoJ decision and the BoJ took longer than usual to announce their decision to tweak policy and expectations that this signaled a change in policy proved correct.

Key Quotes

“In essence the BoJ tweaked current policy voting in favour 7-2. While it kept the deposit rate at -0.1%, it did not specify an absolute level by which the monetary base would expand (was ¥80t previously). How quickly the monetary base expands will be a function of what the BoJ terms ‘yield curve control’. Given the BoJ also announced scrapping the average maturity target of JGB holdings (current average maturity of JGB holding of BoJ portfolio is 7-12 years), we would imply this to mean a greater focus to buy short–mid dated JGBs.

The market reacted appropriately, USDJPY rallying above ¥102.6, 10yr JGBs selling off 5bps post BoJ and 2yr JGBs +1bps. The BoJ specified that it would want to see 10yr JGBs at current levels, implying the BoJ will try to prevent yields rising too far from here and we subsequently saw a reversal of most of the 10yr JGB sell off, 10yr JGBs +2bps now.

Otherwise the BoJ did what it could to ensure the market read today’s policy move as dovish, stating the BoJ could cut rates further into negative territory if required, that it is looking to overshoot on inflation and stating the Japanese economy is no longer in deflation. We await further details at the BoJ Press Conference in 1 hour (3.30pm Tokyo time, 7.30am London).

In other markets, USTs and ACGBs spiked about 5bps on the BoJ announcement and like the JGB 10yr move, yields have retraced, up 2bps now. In FX, the USD is firmer across the entire G10 space and most Asian crosses, by +0.2% except the gains is outsized vs the Yen, +1%.”