Could the Bank of Japan Surprise us?

We have 5 major Central Bank meetings and rate decisions in the first two weeks of November - Bank of Japan on Tuesday, the US Federal Reserve on Wednesday, the Bank of England & Norges Bank on Thursday and finally, the Reserve Bank of Australia on the following Tuesday, Nov 7.

Since, the last meetings of all these major CB's, yields have headed appreciably higher and given that most of the increase has occurred at the longer end, there is growing consensus that the US is exporting higher yields and their “bear steepener” to the rest of the world. We've also seen inflation remain on the stickier side particularly with regard to headline inflation exacerbated by rising oil and commodity prices due to the war in the Middle East.

Today we focus on the Bank of Japan because it would seem that a change in policies could be warranted there given their current predicament with rates and currency.

The BoJ decision is set to be released around 12pm Tokyo on 31 Oct 2023 which would be 11pm ET tonight 30 Oct 2023.

The last BoJ meeting on 22 Sep 2023 was quite uneventful. There were no economic projections and no changes made during the meeting.

Since then, however, we've had a number of changes which could prompt the BoJ to make some changes during this meeting:

• 10Y Japanese Government Bond (JGB) Yields have been hovering above 0.8% While the YCC band remains at 1%, swaps are pricing in a higher level.

• USD/JPY has crossed the 150 Yen to Dollar mark

• Inflation has come in higher than forecasts.

• The US Dollar has strengthened meaningfully on the back of higher US Treasury Yields.

Yields

There is speculation that the Yield Curve Control (YCC) band may be widened again. This was last widened in to +/- 1% during July and since then the BoJ has been doing unscheduled purchases to make sure that the 10Y JGB Yield remains within this in band. In fact, they've tried to hold it below 0.80%. In the past few days the 10Y JGB has been floating above this level and swaps are pricing in a level higher than 1.12%.

But the BoJ seems to be the only one really demanding bonds here. Recent auctions have gone poorly because pension funds and banks have shown little interest. It makes sense given they anticipate higher yields and lower prices in the next few months. Waiting it out seems to be the view.

What could happen? 

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