BoJ and Yen: watching the curve - Nomura

Analysts at Nomura explained that the BOJ is likely to want to steepen the JPY yield curve to alleviate the negative impact of the negative rate policy on financial institutions.

Key Quotes:

"The BOJ’s comprehensive assessment scheduled next week could be used to send the signal.

Our analysis shows that a higher long-end of the JPY curve after the BOJ meeting would not be JPY positive, if two conditions are met: 1) the short-end of the curve stays low or declines further, and 2) risk sentiment is supported. It is also important that US rate hike scenario by year-end is alive after the FOMC meeting, as our analysis shows USD yield movements have a bigger impact on USD/JPY than JPY curve movements.

Japanese investors could resume their domestic bond investment if the BOJ succeeds in supporting the long-end of JPY curve. This behaviour may be viewed as JPY positive.

However, if the Bank can also lower the short-end of curves and support risk sentiment, unhedged foreign portfolio investment by Japanese investors should also increase, supporting USD/JPY appreciation.

The fact that JPY is staying strong amid the historically strongest foreign bond investment by Japanese investors, which is owing to a significant decline in long and super-long yields, also highlights how important it is for the BOJ to focus on the short-end of the curve and risk sentiment in order to weaken JPY."