Bank of Japan shocks markets by changing YCC policy

On Friday, the Bank of Japan declared that it is relaxing its bond yield control (YCC) policy.

The Central Bank increased its prediction for inflation this year, yet kept its ultra-accommodative stance.

At the meeting on Friday, the Central Bank of Japan decided to maintain the key rate at a negative level of -0.1%, in line with its programs for the repurchase of financial assets from the market.

The regulator revised its macroeconomic projections, particularly decreasing its outlook for the nation's GDP growth. Additionally, the central bank increased its median inflation forecast to 2.5% for the 2023 fiscal year, compared to the 1.8% forecasted in April.

The biggest shock was the declaration of increased adaptability in the Yield Curve Control (YCC) policy.

The Bank of Japan stated in a statement that they view fluctuations in the yield of 10-year government bonds (JGB) within a range of plus or minus 0.5 percentage points from the target level as a guideline, not a strict framework.

The Central Bank will purchase 10-year Japanese Government Bonds (JGBs) at a rate of 1% each business day through fixed rate transactions, unless otherwise requested. This action will effectively widen the target yield band by an additional 50 basis points.

Bloomberg reports that Governor Kazuo Ueda of the Bank of Japan has been compelled to strengthen his monetary policy as inflation has been above the 2% target for 15 months in a row and wages have begun to increase after a long period of stagnation.

SEB believes that the removal of tight yield caps will pave the way for further policy changes in the upcoming months.

Scotiabank believes that a rise in long-term Japanese Government Bond (JGB) yields will be beneficial for the yen.

SocGen believes that the narrowing of yield spreads between UST and JGB will make the yen more attractive.

MUFG predicts that the yen will appreciate even more in the upcoming year.

Following the Bank of Japan's (BoJ) decision to make its key yield curve targeting policy more flexible on Friday, JPMorgan has maintained its bearish outlook on the Japanese yen. The bank believes that the BoJ's policy changes necessitate a more substantial increase in inflation in Japan.