We do not expect the BoJ to change its policy at the July meeting, but the likelihood of a policy adjustment (fine-tuning) in Q3 has increased significantly.
We are very sceptical that the BoJ will be able to avoid fuelling normalisation speculation if it hikes the 10Y yield target in July, and the risk of JPY appreciation will keep the BoJ sidelined, in our view.
If media reports that the BoJ is considering changing its 10Y yield target next week are incorrect as we expect, it should in general be positive for global fixed income markets, as we should see 10Y JGB yields edging back towards zero.
We expect USD/JPY to bounce back above 112 if the BoJ keeps its policy unchanged next week, but see little potential for a sustained rally above July's high at 113.17 in the near term. We target 112 in 1-3M.
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