Yeah, so about an hour before Donald Trump delivered his “Shates” of the Union on Tuesday evening, the BoJ increased bond purchases at its regular ops in the 3-5Y bucket in a readily apparent effort to “prove” that the market got it “wrong” earlier this month when everyone “misinterpreted” a trimming of 10-25Y buying as a sign that Kuroda is thinking about how to slowly normalize policy against a backdrop of improving macro and inflation expectations.
If you recall, that paring of 10-25Y purchases was one the events that catalyzed this month’s bond selloff (it was the next day when Bill Gross called for a bond bear market). That would be the bond selloff that’s seen 10Y USTs put up some of their worst risk-adjusted returns to start a year in history on the way to rattling the previously bulletproof equity rally.
Two weeks later, at the January BoJ meeting, the bank tweaked its inflation language which seemed like more confirmation that the narrative was changing only to have Kuroda talk back the knee-jerk lower in USDJPY a couple of hours later at the post-meeting presser. Then, three days after that in Davos, Kuroda sounded an upbeat tone on inflation thus effectively walking back his own efforts to walk back the tweak to the BoJ language only to have the BoJ issue a “clarification” on Friday afternoon. So yeah, a cluster fuck made immeasurably worse by Mnuchin’s weak dollar rhetoric. Again, it’s all about trying to keep the yen from appreciating at a time when speculation is running rampant about the BoJ’s purported desire to start down the normalization path.
That was the context for this:
- BOJ LIFTS 3-5 YR JGB BUYS TO 330B YEN; WAS 300B YEN IN LAST OP.
And the reaction was immediate:
As we flagged immediately last night, there’s something silly about this. That is: should the market care about these ops or not?
BoJ thing is hilarious. they dismissed market's interpretation of the Jan. 9 reduction of 10-25Y JGB purchases but now, they're basically saying market should in fact pay attention to purchase volumes by upping buying in 3-5 year zone
— Heisenberg Report (@heisenbergrpt) January 31, 2018
Of course the global bond market seemed to react more strongly than the JGB market to the paring of 10-25Y purchases earlier this month, so it’s the FX market reaction (i.e. yen appreciation) that’s got them worried. “While domestic bond market isn’t seriously worried about the BOJ winding back stimulus, currency markets have raced one to two-years ahead, so the BOJ wants to quell such speculation,” Nissay Asset Management’s Eiichiro Miura told Bloomberg on Wednesday, adding that “the BOJ’s operation today was within expectations [as] the rise in JGB yield provided them with an excuse to boost purchases, as the BOJ probably wanted to calm currency market speculation.”
As far as yields go, they “succeeded”. The 10-year yield fell 1bp to 0.08% and the five-year yield slipped 1.5bps to -0.085%:
But as you can see from the first chart above, the knee-jerk higher in USDJPY faded and that’s the point. Which is amusing because I actually saw someone claim that the yield chart was “more to the point”. This is about the FX action. The JGB market didn’t react nearly as violently to the 10-25Y news earlier this month as USDJPY did, something countless people have pointed out from Bloomberg to Goldman.
“The dollar-yen’s downtrend was led by dollar weakness, and it may prove difficult for the BOJ to reverse its direction through actions such as boosting bond purchases,” Bank of Tokyo-Mitsubishi UFJ said overnight, adding that “the currency market is bracing for potential normalization of monetary policy by the BOJ and this will make it difficult for the yen to weaken.”
Right. And see that’s the point.
This might seem esoteric, but to the extent you care about Albert Edwards’ thesis with regard to whether a surprise BoJ tightening and the yen appreciation it would entail could end up being the black swan everyone is looking far and wide for, this is something you should probably keep an eye on.
