TOKYO : Investors have dialled down wagers on a policy shift at the Bank of Japan this week, which has opened a window of calm that ironically affords governor Kazuo Ueda a chance to move quickly.
The gap between market-set 10-year interest rate swaps and 10-year government bond yields, which the BOJ caps, is at its narrowest in eight months and almost 40 basis points tighter than when it was at its widest in 25 years in January. "By process of elimination they have to adjust yield curve control before June-July consensus," he said, which could be by widening or moving the 10-year yield target band that currently keeps yields within 50 bps of zero percent.Sources familiar with BOJ thinking say such changes may be delayed, and instead Ueda could adjust guidance on the outlook and drop references to COVID-19 shaping policy.
With the BOJ spending a staggering $1 trillion defending that cap in the year through to March, along with other measures to make shorting costlier, a lot of investors have given up. "It seems many funds were forced to cover their short positions," said Tomohiro Mikajiri, head of yen and non-yen fixed income trading in Japan for Barclays."Hedge funds which attacked the BOJ's policy have retreated from the game."