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The BOJ released it's JGB purchase plan for Jun yest afternoon.

  • It's mostly unchanged relative to May, with avg purchases in the 1-3yr segment staying at Yen250 bln, 3-5yr segment at Yen300 bln, 5-10yr segment at Yen450 bln, 10-25yr segment at Yen200 bln, greater than 25yr segment at Yen100 bln.
  • The only difference comes in the purchases of the less than 1yr segment, where avg purchases have been raised to Yen100 bln from Yen75 bln in May.

Backdrop

As a backdrop, the BOJ has been reducing it's JGB purchases in the 1-5yr segment over Apr/May given the fall in yields in Mar, although the rebound in both the 2yr and 5yr yields in recent times has negated the need to cut purchases further for now.

Note too that the BOJ is loath to cut purchases in the mid sector given any such move would jolt the market and push the 10yr yield significantly higher, which then brings back the spectre of an unlimited bond purchase operation last seen in early Feb.

  • Recall the BOJ's rumoured line in the sand was the 10s pushing well above 0.100%.

Looking ahead from here

The rebound in 2/5yr JGB yields have not been overly drastic.

Add in the fact that the BOJ may also need to factor in global risks.

  • UST yields have been soft since the Trump political controversy started, Gilt yields are on the backfoot amidst UK political uncertainty.

As such, we see the possibility that the BOJ may well cut purchases in the front-end in Jul.

  • Specifically, purchases in the 1-3yr segment could be cut by Yen10 bln.

YCC machination facilitates tapering that's gone under the radar

We pointed out back in Sep 2016 when the BOJ shifted to a YCC strategy that because of how purchases would vary according to yield gyrations, there was a possibility of "tapering" if it needed to buy less (or sell) JGBs in order to counter a fall in yields outside of it's desired range.

This YCC machination and the BOJ's reduced JGB purchases over the past 2mths has actually been a form of quiet tapering.

  • Note how BOJ Kuroda pointed out previously on 10 May that their monetary base has been increasing at a Yen60 trln annual pace (much lower than the soft target of Yen80 trln annually), which was somewhat lost in translation on the day of his speech.
  • Thus, contrary to the BOJ's insistence that it will ease further if needed, they are actually quietly tapering under the guise of YCC.
  • Even if they were to increase the amt of purchases from here, it would merely bring them back to previous levels, which in the most arcane definition, isn't doing more.

BOJ policy

The next BOJ meeting is on 15-16 Jun, and we don't expect any policy changes from them.

As we mentioned in our viewpoint posted on 25 May, the upside pressure in 10yr JGB yields has abated alongside UST yields (owing much to the Trump political turmoil), which negates the need to tweak the YCC targets (guiding s/t rates to -0.10%, targeting the 10yr yield around 0%) at this stage.

As mentioned then, our expectation of the window opening up for a change in BOJ policy has been pushed back from Sep to Dec, which would bring it more or less in line with the end of the ECB's QE program, and we expect the BOJ will keenly follow the market reaction to the ECB's move as a template.

  • For the 10yr JGB yield, we are still expecting it to consolidate around 0.047% for the time being. That said, 2-way risks btwn 0.015-075% abounds in accordance with it's UST counterpart, with Trump's political fortunes serving as the trigger.
  • For the 20s, we expect it to mostly trend sideways btwn 0.520-605% in the n/t. JH

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