(Bloomberg) -- An unexpected spike in Japan’s services inflation is more likely to lead to a tweak in Bank of Japan policy than ructions in the bond market, according to JPMorgan Chase & Co.
Despite already owning around 50% of Japan’s government bonds, there is still enough room for the BOJ to increase holdings and defend its yield-curve control policy from speculative pressure, strategists including Nikolaos Panigirtzoglou wrote Wednesday. But policy normalization could come from upward pressure on prices in the economy, something which hasn’t been seen yet, they said.
“The sustainability of the BOJ’s defense of the 10-year yield target is unlikely to be challenged by a dearth of bonds, but could come under greater pressure in the event of a faster-than-expected acceleration in domestic services CPI,” the strategists wrote. “Thus far, however, service price inflation has shown little sign of upward pressure.”
The Big Japan Short Is Back for Hedge Funds Betting Against BOJ
The BOJ has ramped up bond purchases this quarter as speculative attacks mounted on bets it would be forced to tweak its curve control policy which caps benchmark yields at 0.25%. The central bank is pushing back against normalizing policy, insisting the Japanese economy still needs support and inflation requires firmer wage growth to become stable.
While Japan’s key price gauge has climbed above the Bank of Japan’s target level of 2%, services inflation has remained muted.
Panigirtzoglou and his team estimated there’s still around 500 trillion yen ($3.7 trillion) of government debt left in the market, leaving plenty of room for the BOJ to boost purchases to keep yields low. The central bank could also increase regular so-called Rinban purchases which are spread out over a broader set of notes, they said.
The BOJ is due to release its quarterly bond buying program later Thursday.
Momentum-based investors have been part of the cohort selling Japanese debt and likely remain quite short, according to the JPMorgan team. Macro discretionary hedge funds have also likely participated, it said.
“They likely see the payoff as largely asymmetric -- even if the BOJ does not eventually cave in, yields are likely to remain close to the upper bound of its target range at 0.25%,” the strategists wrote.
©2022 Bloomberg L.P.
Advertisement