It turns out that the Bank of Japan is pretty unconcerned with what market hive-mind might think about it.
Here is a one day USDJPY chart that screams macro hedge fund pain.
Since last autumn the winning trade has been to bet on Japanese yen appreciation against the dollar, on the expectation that the BoJ would inevitably have to cave in to pressure and scrap its yield curve control policy.
After tweaking it last month, some people thought a major overhaul or perhaps even an end would be announced at today’s BoJ meeting — Haruhiko Kuroda’s penultimate as governor. Instead, the only meaningful thing to come out of the BoJ today was an enhancement of its fund-supplying operations to make it easier to maintain control of the curve.
Here’s Duncan Wrigley of Pantheon Economics:
Under the previous rule, the BoJ could provide collateralised loans to banks at up to 10 years in duration at a fixed rate, which was 0%. The change allows the Bank now to offer variable rate loans too. This means the BoJ can steer down market rates by offering negative interest rate funds to banks, and Governor Kuroda today hinted that the Bank will make use of this option. In addition, the Bank can offer cheap funds at shorter terms than 10 years, to smooth out the yield curve kink. The current yields for 8-year bonds, at 0.61%, and the 9-year bonds at 0.57%, are both above the 0.5% yield cap for 10-year bonds.
We think the BoJ will remain in a holding pattern at least until the economy recovers, likely later this year. Governor Kuroda said Japan is still in the middle of a pandemic recovery. Both domestic demand and exports are weak, and wage increases have not kept up with consumer inflation. The pressure on the yen has eased, as the broad dollar index has weakened since November, though import inflationary pressure is still driving up consumer inflation. Inflationary expectations are creeping up, and China’s economic reopening should support Japanese economic recovery from March onwards, though against the backdrop of tepid global demand.
The next BoJ meeting in March will be Governor Kuroda’s last one, and likely candidates for his successor have been careful not to indicate policy preferences in public. On balance, we still think that the underlying economy is relatively weak, and a rate hike is unlikely this year.
Today’s decision sent the yen down 2.5 per cent vs the greenback, its biggest tumble since March 2020, and pushed 10-year Japanese government bond yields down by 10 bps to 0.4 per cent (once more well below the BoJ’s 0.5 per cent ceiling).
Those are moves big enough to suggest some people were leaning waaay too heavily the other way, despite a major change at today’s meeting always seeming pretty unlikely (to FTAV at least).
As the below titbit from Deutsche Bank earlier this week indicated, the BoJ has taken “whatever it takes” to a whole new level beyond the comprehension of the pygmy minds of markets (our emphasis):
So extreme is the market’s Japanese government bond underweight that it is reported that the BoJ may own more than 100% of some benchmark 10-year JGBs. Not only has the central bank bought the entire stock of bonds, it has lent it out to short-sellers who have sold it back to the BoJ.
Genuine LOL.
Further reading
— Top contender for next BOJ chief keeps up guessing game over intentions (Nikkei Asia)
Read the full article here