Implications for a change in Japan's Yield Curve Control

I wrote an article last week about the Bank of Japan and their rate decision to be announced at 11pm ET today (3am GMT).

There is speculation that the BoJ may tweak the Yield Curve Control (YCC). The YCC means that their 10 year yield floats within the band of +/-0.5%.

I don't know if they do but, I doubt they will change their stance on easing completely given that they are nowhere close to their goal in terms of wages and consumption. What we will be looking for however, is a change to their inflation estimates from 1.8% to 2% or more.

The Nikkei came out with this article today talking about the change to YCC:

https://asia.nikkei.com/Economy/Bank-of-Japan/BOJ-to-discuss-yield-curve-control-tweak-to-allow-rates-over-0.5

What happens if they tweak the the Yield Curve Control? 

If they consider a change to the YCC - widening the band yet again or even abandon YCC:

• The Yen will soar putting pressure on the US Dollar: When yields go up, money flows into the country strengthening the local currency. (You’ve seen how the US Dollar has gained strength in the last few months as yields rose in the US)

• Global bond yields will rise putting pressure on bonds globally including the US. This however, in turn will also push up the USD logically speaking, but there remains to be seen how much the yields rise and whether it is enough to counteract the strength of the Yen. For now, hedge funds have been shorting the JGBs with the view that yields will rise and the US 10-year has also been inching up past 3.5%

• Finally, the yields rising will mean the Japanese stock market (outside the banks and perhaps insurance companies) will take a hit. But, let’s not forget that rising yields could also mean that the US markets take a hit.

Here’s my previous article for more background: