European Open: BOJ Members Discussed Tweaking YCC, Jan Minutes Reveal

Good morning traders and investors; welcome to today’s European open. This morning, the BOJ’s minutes from their January meeting were released, revealing that members had discussed the feasibility of making further tweaks to their yield curve control (YCC) policy.

The B OJ’s YCC Policy

Before we delve into the details of the minutes, let’s quickly refresh BOJ’s YCC policy. In 2016, the BOJ introduced YCC as part of its monetary policy framework. With YCC, the BOJ aims to keep the 10-year Japanese government bond (JGB) yield at around 0%. They do this by purchasing JGBs when yields rise above their target and selling JGBs when yields drop below their target.

Now, on to the minutes. If you cast your mind back to early January, you may remember the BOJ’s out-of-meeting policy change, which expanded their YCC band from +/- 0.25% to 0.5%. This sent shockwaves across currency and bond markets in anticipation that they may scrap YCC altogether.

BOJ Discusses Tweaking YCC

Today we learned that the BOJ did discuss various ways of tweaking the YCC band but opted to err on the side of caution as changing it ‘so soon after the previous modification’ could make future policy guidance ‘unclear.’

This is odd when you think about it, given they were caught off guard by low-liquidity markets with their out-of-meeting change to that same policy. Still, it’s interesting that they discussed the possibility of curbing yields across the entire curve, as it’s a scenario few (if any) are prepared for. And it hammers home how dovish they intend to be for quite some time.

But ultimately, the BOJ wants to take its time examining the effects of future changes. As the incoming Governor gave nothing but dovish remarks, we’ll not hold our breath for a change soon (but understand they may make one anyway, seemingly randomly).

Related Facts

• The sentiment was given a little boost on slightly stronger-than-expected China data.
• While the numbers do not set the world alight, it was enough to weaken the yen and USD against AUD, EUR, and GBP in the context of a poor start to the week.
• Rating agency S&P Global warned that New Zealand’s credit rating could be lost if its trade balance does not improve.
• Business sentiment in Australia is cooling, according to a Westpac survey, with slower new orders and an economy that is close to full capacity (which plays further into the potential for the RBA to pause in April)
• As for these alleged ‘drone wars’… the US military has claimed that one of its spy drones…

Key Takeaway

The BOJ’s minutes indicate they are not done tweaking their YCC policy yet. The discussion of curbing yields across the entire curve is a scenario few are prepared for. As markets continue to monitor central bank policy globally, it’s important to monitor how the BOJ evolves its policy framework in the coming months.

Conclusion

Well, that’s it for today’s European open. The BOJ minutes provided an interesting look into the central bank’s thinking regarding its YCC policy. As always, watch market-moving news throughout the day and happy trading.