Spread control and JGB returns… Yield curve control, which is in practice in addition to BOJ's standard asset purchase program, but now intensifies direct interventions, has also started to be challenging. 10-year JGBs, which rate well above the benchmark interest rate, hover at 0.25%. BOJ will buy unlimited bonds and control the yields so that this rate does not open (it can be compared to the currency peg, in developed countries it was controlling the Swiss CB EURCHF peg a few years ago, it later released it). BOJ's spread control will increase the spread with USTs. The BOJ currently remains in an expansionary perspective due to growth concerns typical of Asia. Sensitivity about inflation and growth is at different points compared to the Fed. Considering Japan's chronic deflation problem, the desire for a structural inflation settlement can be understood. Of course, it is important that this inflation is compatible with the target path of 2%.

UST-JGB vs JPY… Source: Bloomberg

Fed approach, marginal expectations… Recently, the expectation that the Fed will increase interest rates aggressively has gained weight in the markets. Accordingly, swap traders are pricing in 4 jumbo (50 bps) rate hikes until September. Would one of the 50 bps movements be 75 bps? This possibility can also be revived in any outlook where inflation is out of control. In this aggressiveness of the Fed, while Asian countries will approach the event with a growth-oriented approach, it will be expected that the yield gap will open up very seriously. In an environment where the US 10-year interest rates approach 3%, the marginal expectations are active, and the further increase in the dollar and UST rates will mean that currencies such as the yen and yuan will become less valuable.

Control of monetary easing… The Bank of Japan implemented yield curve control in 2016 in order to achieve the 2% price stability target as soon as possible. This policy framework consists of two main components: First, “yield curve control”, where the Bank will control short-term and long-term interest rates; The second is a “commitment to exceed inflation and remain consistently above target,” in which the Bank commits to widening the monetary base until the observed consumer price index exceeds the 2% annual rate of price stability target. while the Bank will purchase Japanese government bonds (JGBs) to keep 10-year JGB yields at the current level In case of a sudden increase in interest rates, the Bank will purchase fixed rate JGBs - for example 10-year and 20-year, to prevent the yield curve from deviating. Regarding JGB returns – will do. In market transactions aimed at controlling the yield curve, the rate of increase in the base money may fluctuate in the short run.

Conclusion? The yen is depreciating under pressure from a Bank of Japan determined to keep local yields flat on the ground even as interest rates around the world rise. The sharp contrast between BOJ and Fed policies encourages a wave of bets on a further weakening of the yen. However, the rise in Japanese inflation has remained modest so far, as Japan's March CPI accelerated only slightly to 1.2% year-on-year. On the other hand, if Japan is unable to maintain and remove spread control, it will create a serious volatility effect, JGB yields will rise and limit the increase in USTs. Spread control will increase the separation.

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Hibya Haber Ajansı