Whilst necessarily surprising, the Bank of Japan's unexpected decision to raise it's Yield Curve Control (YCC) ceiling is also sufficiently important. In fact, so important that investment managers globally are getting excited about the prospect of a new dawn for Japanese equities and bonds.
But before this excitement spills over into new investor allocations, the question is whether the BoJ allowing 10 year Japanese Government Bonds (JGB's) to trade in an increased range (up from +/25bps to +/-50bps) versus 0%, is actually a catalytic call to action.
Japan has been fighting deflation for decades. Today the current benchmark rate is set at -0.1% despite inflation hitting a multi decade high in November at 3.8%, well above the BoJ 2% policy target. Yet Japan has also been one of the few countries globally not to have tightened monetary policy in 2022. It should also be noted that Japan is also one of the few countries globally with a Debt/GDP ratio above 200%, of which approximately half is owned by the Bank of Japan.
Put differently, any decision by the BoJ to meaningfully tighten monetary policy at this stage may have less desirable side effects. Neither Governor Kuroda, nor his successor in April 2023, wish to be responsible for extinguishing these early inflationary sparks that could alight a long awaited cytlce of wage inflation, higher consumer expenditure and capex growth.
Nevertheless, as a signal, the widening of the Yield Curve Control ceiling has investment managers and institutional investors seeing amber. Which means they may be changing up a gear in 2023 when it comes to Japanese assets.
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