Yen Poised To Head Higher Again As BOJ Nears Bond-Buying Limits

By Simon White, Bloomberg Markets Live reporter and strategist

Inflation pressures and financial-stability risks will likely prompt the BOJ to pull back on its bond-buying policy sooner than expected, boosting the yen.

Kazuo Ueda, nominee for the next BOJ governor, made clear he is not planning to reverse course on the central bank’s easing program, in remarks made today to the parliamentary hearing as part of the confirmation process. Nonetheless, he may end up having to do just that as inflation rises and the BOJ impedes smooth market functioning in the JGB market.

Both core and headline inflation in Japan have raced higher to multi-decade highs. The expectation is that this is temporary, but inflation that remains elevated for an extended period of time can become persistent and endemic. In Japan, longer-term inflation expectations of households and businesses have risen sharply, risking becoming unanchored.

The BOJ continues to buy bonds to keep the 10y yield under 0.5%, but this is becoming increasingly futile as other yields around the 10y point are pulled higher, leaving the 10y JGB’s yield looking anomalous.

Furthermore, the BOJ itself appears to be uncomfortable that it now owns half the JGB market. Since that threshold was crossed, there has been a rapid rise in loans it makes to commercial banks, indirectly encouraging them to use the proceeds to buy government or corporate debt.

Liquidity conditions in the JGB market are already deteriorating, and pressure is at risk of intensifying as US and global yields show signs they are beginning to factor in a greater premium for a world where inflation is a feature, not just a bug.

USDJPY has rallied since Ueda’s nomination was announced. This is partly due to the rise in the dollar, but it is mainly a result of a weaker yen.

This leaves USDJPY vulnerable to resuming its selloff, as the BOJ ultimately has to renege on its easing policy sooner than Ueda infers, or the market expects.