📝BoJ to Return to RINBAN Style Operations: MUFG

The BoJ’s decision to make yield curve control operations more flexible came half a year earlier than we had been expecting, so we now revise our outlook for JPY rates as below. While we plan to revisit our JPY rate outlook again after the government announces its FY23 budget and JGB issuance plans later this month, we think that the JPY yield curve, especially the long end, is less likely to rise from the level immediately after the BoJ meeting, as long as market participants view the increase in JGB buying for December calmly. Over the near term, Japanese investors could return to Japan and their rebuilding of JPY bonds could dominate, so we expect a tightening bias for JPY basis from early 2023 for some time The BoJ had decided to increase buying of JGBs through the long end of the JGB yield curve and increase the frequency of buying and has shown its intention to control extreme yield rises. The decision will make any steepening on the long end of the JGB yield curve less likely and increase the country’s monetary base.

Before the BoJ meeting, we were getting inquiries about how the FY23 government budget will balance an increase in defense spending with JGB issuances. Today’s decision means that JGB market functions will have to be considered in tandem with government funds and JGB issuances. Market focus for 2023 had been on the unified local elections and upward stresses on inflation and G10 rates, and today’s BoJ decision came as a surprise to market participants. This is probably because policy issues ahead of the unified local elections had shifted to the balance between inflation countermeasures and government fund flows. We think this is why the BoJ began to loosen yield curve control operations at its own pace, different from the timing of other G10 countries.

The BoJ has begun to make JPY yield control operations more flexible before the end of current Governor Haruhiko Kuroda’s term and make changes to JGB buying in terms of 1) range of buying sums; 2) frequency; and 3) schedule. We think the BoJ will ultimately return to its general RINBAN style operations, not revealing anything about JGB buying, and focus on stabilizing prices and the financial system. - MUFG