JPY: Can BOJ steepen the curve? – Nomura

Research Team at Nomura, suggests that the September BOJ meeting is approaching, where the Bank is scheduled to release the comprehensive assessment, on top of its usual policy decisions.

Key Quotes

“It is getting clearer that the Bank is likely to keep its negative rate policy as the major policy tool beyond the assessment. However, the BOJ likely wants to steepen the JPY yield curve, to alleviate the negative impact of the negative rate policy on financial institutions.

Although the Japanese yield curve has already steepened, further moves in the Japanese yield curve structure are possible. Thus, we update our analysis on the relationship between USD/JPY and the JPY yield curve. This analysis shows that a higher long-end of the JPY curve will not be JPY positive, if two conditions are met; 1) the short-end of curve declines further or at least stays low, and 2) risk sentiment is supported.

The JPY-positive impact of a 20bp increase in the long-end of the curve can be offset by just a 10bp decline in the short-end of the curve, and the risk sentiment impact can be more significant too. The historical relationship and Japanese investors’ behaviour suggest that, to weaken JPY, it will be important for the BOJ to focus more on the short-end of the curve and risk sentiment, than the long-end of curve.”