Fiddling around with YCC will not trigger a sharp fall, but it helps cap the upside – SocGen

The BoJ tweaks, fiddles, and tinkers around. Kit Juckes, Chief Global FX Strategist at Société Générale, analyzes JPY outlook.

YCC is a dangerous policy which needs to be retired as soon as possible

Short term BoJ inflation forecasts have been revised up, longer-term ones left alone, reflecting lack of confidence that deflation is in any way defeated. The longer-term growth path is also unimpressive with 2025 GDP at 1%. Given this evident lack of confidence in the future, it’s no surprise that the BoJ is reluctant to allow bond yields (or the Yen for that matter) to soar. Economists’ consensus forecasts are no more hopeful, overall.  

Despite this, YCC is a dangerous policy that needs to be retired as soon as possible. And by anchoring JGB yields at a time when other major central banks have been raising rates, it has been a major factor in the yen reaching its lowest level, in real terms, since the 1970s. So, the BoJ wants to very carefully dismantle YCC, and the Yen will rally as slowly as they do so. For the moment, that means there is little upside to USD/JPY, but the fall from here is also likely to be very slow until the global trend in bond yields turns decisively lower.