TOKYO – Investors have dialled down wagers on a policy shift at the Bank of Japan this week, which has opened a window of calm that ironically affords governor Kazuo Ueda a chance to move quickly.
For months investors have been doubting policymakers’ assurances that the BOJ isn’t planning to change its ultra-easy settings yet, with speculation hitting fever pitch in January after a sudden adjustment to BOJ yield targets late last year.
Ueda has given no clues a fresh move is imminent and accordingly pockets of dislocation in the bond market, where short-selling has focused, are easing, and traders are pushing back expectations for policy tweaks to June or July.
The gap between market-set 10-year interest rate swaps and 10-year government bond yields, which the BOJ caps, is at its narrowest in eight months and almost 40 basis points tighter than when it was at its widest in 25 years in January.
Dealers say BOJ efforts to make short selling more expensive have also worked and that investors are simply avoiding the market, rather than crowding into bets on yields rising.
Implied dollar/yen volatility in the currency options market is well below January highs too, suggesting forex traders aren’t expecting wild moves either.
The calm could be opportune for the BOJ.
“I’m thinking that the market is very under positioned (for a shift),” said James Malcolm, head of FX strategy at UBS in London, where the house view is for the BOJ to move in June or July, but he sees a risk policymakers take their chance to act.
“By process of elimination they have to adjust yield curve control before June-July (market) consensus,” he said, which could be by widening or moving the 10-year yield target band that currently keeps yields within 50 bps of zero percent.
Others believe yield targets could be abandoned altogether.
Sources familiar with BOJ thinking say such changes may be delayed, and instead Ueda could adjust guidance on the outlook and drop references to COVID-19 shaping policy.
Nearly 90 percent of economists polled by Reuters said they expect no policy change.
About 40 percent expect a change in June.
Inflation at 40-year highs and the biggest wage rises seen in decades are behind investors’ conviction that years of loose monetary policy must end soon for Japan.
And they have bet in defiance of BOJ rhetoric, a trade nicknamed the “widowmaker” for its propensity to fail. Wagers have centered around short selling the 10-year bonds that the central bank has kept artificially pricey by capping yields.
With the BOJ spending a staggering $1 trillion defending that cap in the year through to March, along with other measures to make shorting costlier, a lot of investors have given up.
Foreigners’ record weekly purchase of JGBs in the week after the March meeting was largely attributed to closing shorts. – Reuters
