JGBs and other catastrophes
BoJ relaxes its yield target and everything is just fine
Over the last year or so, I have made the case that the BoJ could relax its 10-year JGB yield target on its own terms, without a disorderly exit and disruption to global markets. In particular, we argued that the RBA’s exit from its 3-year yield target, which inspired the BlueBay and other JGB shorts, was a poor model for understanding the dynamics around the BoJ’s yield curve control regime.
For all the catastrophising around the prospective demise of the yield target in Japan, in the event, markets did pretty much the opposite of what the catastrophists expected. Global bond yields fell in the wake of this week’s announcement from the BoJ, in sharp contrast to when the BoJ last adjusted its yield target in July, which coincided with a run-up in yields, but was probably not significantly causal. JPY put in new 33-year lows, despite expectations for official intervention to arrest the decline. The JPY is the worst performing currency against the USD this year.
Needless to say, this left may market commentators stumped. The FT’s Alphaville said:
it should be acknowledged that the BoJ has managed to engineer a cautious, gradual but unmistakable euthanasia of YCC without too much fuss. Even Alphaville had some doubts that this could be pulled off.
John Authers said:
The Bank of Japan baffled most of us with its announcement earlier this week that it was kind of lifting its policy of yield-curve control.
Stefan Angrick at Moody’s Analytics was one of the few analysts to properly contextualise the BoJ’s actions ahead of this week’s announcement:
dropping YCC would simply eliminate what has by now become a fairly modest commitment to the 0 per cent yield target. Even without a formal peg, the BoJ would maintain some form of quantitative easing to limit government bond market volatility. More importantly, though, Japanese government bond yields just don’t have very far to go. Even without YCC, the 10-year JGB yields would probably top out at 1 per cent. Other estimates might put yields a bit higher or a bit lower, but what they all have in common is that they’re not too far from the 0.85 per cent rate 10-year JGBs are trading at now.