Mar 23, 2023
Dovish Fed Hike Eases Pressure on Ueda to Change BOJ Policy
(Bloomberg) -- A dovish Federal Reserve decision and muddier outlook for the US economy may take pressure off next Bank of Japan Governor Kazuo Ueda to reduce the central bank’s ultra-easy policy settings.
The Asian nation’s 10-year bonds rose Thursday, tracking a rally in Treasuries, after the Fed weakened the language it used to describe future rate increases, while Chair Jerome Powell said policymakers considered a pause in policy tightening.
Yen 10-year overnight-indexed swaps, which speculators typically use to bet against the BOJ’s 0.5% yield cap, fell to 0.58%, after being as high 1.04% in January, indicating receding bets for any potential increase in the threshold. Speculation about policy tightening intensified last week after labor unions won the biggest wage hikes in decades.
The failure of three US lenders and the rescue of Credit Suisse Group AG have also added to speculation that a global banking turmoil will prompt major central banks to go easy on their tightening campaign.
“There’s almost no chance for the Bank of Japan to alter its yield-curve-control program in April” given the uncertainties facing the Fed in future meetings, Chotaro Morita, chief rates strategist at SMBC Nikko Securities Inc. in Tokyo, wrote in a research note. “Bets on a YCC tweak may be unwound further on a large scale.”
Ueda, who will preside over his first policy meeting as governor in late April, said last month the benefits of monetary stimulus outweigh its side effects.
The BOJ doubled its 10-year yield cap from 0.25% in December with the goal of improving market functioning, but the move only fueled speculation more changes were in store, prompting the central bank to boost debt purchases. Market liquidity dwindled, with traders turning to the BOJ to borrow securities in order to short them or for other transactions.
But now there are some signs that bets against the yield ceiling are easing. The BOJ’s holdings of some 10-year bond maturities have fallen, suggesting some traders who borrowed them ended up paying a penalty and buying them.
“Foreigners might have to buy from the BOJ in the end” to cover their short positions, said Shoki Omori, chief desk strategist at Mizuho Securities Co. in Tokyo. “The big picture is I see fewer short players” in Japan’s government bond market, he said.
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