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Bank Of Japan Not Concerned About Increase In Bond Yields‏

ByDanske Markets
Published 05/22/2013, 08:21 AM
Updated 05/14/2017, 06:45 AM

There were no major surprises in connection with today's Bank of Japan (BoJ) meeting and the market impact should be neutral. The expansion of the monetary base (now the main policy instrument) was maintained at JPY60-70trn. In addition BoJ as expected upgraded its view of the economy and now believes that the economy has started to recover.

Interestingly enough there was no mention of bond yields in the statement, suggesting that BoJ does not regard the recent increase in government bond yields a major problem. Rightly so in our view, as the increase in bond yields has been more than offset by higher inflation expectations. However, inflation expectations remain substantially below the 2% targeted by BoJ and hence the increase in bond yields cannot so far justify a scaling down of BoJ's monetary expansion.

Despite a relatively strong recovery in the coming quarters the Japanese economy will continue to need the support of a very accommodative monetary policy next year when the fiscal policy will be tightened markedly. Hence. monetary policy should continue to favour a weaker JPY. That said, there could gradually be stronger headwinds for a weaker JPY as we are now moving into territory where some policymakers will start to regard JPY as undervalued.

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