There was fresh evidence on Monday to support the contention that the Bank of Japan faces a particular tedious communications challenge on Tuesday amid “rumors” that Kuroda and his merry band of “positive” thinking reflationists are beginning to question the effectiveness of their own policies.
For the third time in a week, the central bank was forced to step in with a fixed-rate purchase operation to cap 10Y yields, which rose to 0.11% on Monday, reflecting ongoing speculation about tomorrow’s policy decision (or, to let consensus tell it, policy indecision).
As you can see, these operations are few and far between and have only been deployed a total of seven times, so the fact that they’ve conducted a trio of them in the short space of a week is notable, as was the size of Monday’s operation. The BoJ’s offer to purchases an unlimited amount of bonds at 0.10% garnered JPY1.6 trillion in bids (all accepted) versus just JPY94 billion in Friday’s operation.
Like Friday’s operation, the level at which the BoJ offered to buy was 0.10%, down from 0.11% at previous operations for the 5-10 year maturity zone, which to some suggests that nothing is set in stone going forward. Monday’s operation marked just the third time that traders took the BoJ up on its offer (Friday and February’s 2017 operation marking the two other instances). With yields above the BoJ’s bid (prices below), traders simply arbed the difference.
| When | Offer | Zone | Bid | Result |
|---|---|---|---|---|
| Yrs | % | JPYbn | ||
| July 30, 2018 | Unlimited | 5 -10 | 0.10 | 1640.3 |
| July 27, 2018 | Unlimited | 5-10 | 0.10 | 94 |
| July 23, 2018 | Unlimited | 5-10 | 0.11 | None |
| February 02, 2018 | Unlimited | 5-10 | 0.11 | None |
| July 07, 2017 | Unlimited | 5-10 | 0.11 | None |
| February 03, 2017 | Unlimited | 5-10 | 0.11 | 723.9 |
| November 17, 2016 | Unlimited | 1-3, 3-5 | -0.090 (2s), -0.040 (5s) | None |
On Monday, Goldman was out with a second preview of the BoJ meeting that neatly documents the bank’s options. To wit, from Goldman:
A number of conceivable options are open to the BOJ, including (1) raising short- and long-term interest rate targets, (2) shortening the long-term interest rate target term, (3) widening the tolerable band from its 10-year rate target, (4) removing the guideline for JGB purchases, (5) reducing its ETF purchase guideline, and (6) changing the composition of its ETF purchase program. We think it would be difficult to employ options (1) and (2) because these would highly likely be interpreted by the market as the BOJ effectively withdrawing its inflation target. As such, we think option (3) is the most likely, followed by option (4), on the interest rate front. Regarding ETFs, option (5) would be quite challenging due to the risk it could trigger share price corrections, while option (6) appears feasible, although this option would merely be a default route.
In other words: there are no “good” options, although Goldman obviously doesn’t couch it in those terms. Again, the problem here is yen appreciation. The BoJ needs to guard against that at all costs in an environment where Donald Trump has been keen to jawbone the dollar lower and push for the Fed to lean hawkish in order to ensure the policy divergence between the U.S. and its trading partners doesn’t continue to widen.
USDJPY one-week implied volatility held near a two-month high on Monday as traders prepare for Kuroda.
“We are heading into a week so full of interesting news that the economic previews are stirring as much interest as reviews of the new BMW coupe”, former trader turned Bloomberg columnist Richard Breslow writes on Monday morning, adding that “the most glaring marker is that global bond yields all look like they want to test higher [as] a ‘will they, won’t they’ JGB market appears to be salivating to test the BOJ’s yield curve suppression strategy.'”
There’s more on the BoJ in our version of a “BMW coupe” review here: Blockbuster: Full Week Ahead Preview
