Bank of Japan Governor Kuroda spoke in the Japanese parliament on Friday, with some indications for JGBs and the yen

Kuroda suggested the Bank of Japan would consider exiting its current (extremely) accommodative policy settings in Fiscal Year 2019. While this should in no way come as a shock, JGB traders sent the market on a bit of a wobble.

A few bank responses to the comments were around Friday (in brief below):

Daiwa:

  • To the extent that the BOJ continues to suggest that it will achieve its 2% inflation target in FY19, and we would expect the BoJ to increase its 10Y yield target above zero per cent sometime before the target is met, the comments really shouldn't have come as a surprise
  • ... also expect the BoJ in due course to postpone beyond FY19 the date at which it expects the target to be met
  • ... after all, the consumption tax is set to go up again in October 2019, and we all remember what happened last time that tax was hiked

Deutsche Bank (bolding mine):

What matters is that for the first time Kuroda is explicitly downplaying the open-ended nature of the BoJ's QE program

  • and crucially displaying a willingness to discuss exit in the face of an already materially appreciating yen
  • The implicit signalling is at best tolerance for yen appreciation

From a policy making perspective this benign neglect of the yen very much makes sense: two years of head room is given to the private sector to start preparing for the exit therefore eventually allowing an orderly withdrawal.

  • The key observation is that the JPY needs to appreciate ahead of a move higher in JGB yields.
  • We recently moved our USD/JPY forecast to 100 over the course of the year.

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Justin had Kuroda's comments on Friday (plenty of posts, Kuroda spoke for hours, but here are the critical ones):

Don't fence me in, bro!