TD Securities economists analyze the Bank of Japan’s interest rate decision and its implications for the USD/JPY pair.
Hardliners (10%): Total elimination of the YCC
The Bank of Japan removes yield curve control (YCC) and sets the stage for the end of NIRP, as the virtuous cycle of rising prices and wages takes off. The bank is likely to revise FY2024 core inflation forecast upwards, but more importantly, the FY2025 core inflation forecast could have a 2% zone (previously: 1.6%) to reflect the emergence of Japan’s deflationary past. USD/JPY -2.5%.
Base case (55%): Increase of the upper limit to 1.5%
The BoJ expands the upper limit of the reference range for 10-year JGBs from 1% to 1.5% and potentially increases the rate of its fixed rate purchase operations. The bank could point out that this adjustment is a preventive measure, given the upward risks to wages and prices. Implicitly behind this tightening, the BoJ is probably aware that it is a tough battle to curb the rise in yields due to overseas moves, and real rates could become too accommodative as a result of the upward shift in yield expectations. inflation. Ueda could use this opportunity to lay the groundwork for the end of the YCC in December and the NIRP in January 2004. USD/JPY -1%.
Moderate (35%): No changes to YCC settings
The BoJ leaves YCC adjustments unchanged and reiterates that there is still some way to go to reach the 2% price target. The bank is likely to keep its core inflation forecasts <2% for fiscal 2024 and 2025, in order to convey the message that the current inflationary pressure is transitory and unlikely to last. USD/JPY +0.5%.
Source: Fx Street
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