Bank Of Japan Leaves Policy Unchanged; Warns Growth, Inflation Outlook Skewed To Downside

Expectations for the BoJ meeting tonight were for no change (and perhaps lowering its inflation and growth outlooks) and markets were braced for a whole lot of nothing with overnight USD/JPY vol at its lowest of the year (for a BoJ meeting). Sure enough that is what they got. “No change” across anything policy but cuts to inflation expectations (as well as warnings of a downside skew for growth) left the yen slightly higher.

Bank of Japan Keeps 10-Year JGB Yield Target About 0%

BOJ Maintains Policy Balance Rate at -0.1%

BOJ Board Votes 7-2 to on Neg Rate

BOJ FY2017 Core CPI Forecast Is 1.5%; Prev. Forecast 1.7%

“With regard to the risk balance, risks to both economic activity and prices are skewed to the downside.”

BOJ isn’t seeing any near term turnaround for exports. Says sluggishness is expected to remain “for some time.”

There was some chaos in Nikkei Futures ahead of The BoJ…

Since The BoJ unleashed its curve-management plan, things have been oddly stable…

While Yen has weakened around 4 handles…

Banks have gone nowehere…

As the yield curve has remained relatively flat…

And managing 10Y yields appears to be holding for now…

But while levels/prices may look stable, Expectations for the BoJ meeting JGB market functionality has already deteriorated and we expect it to continue to deteriorate under the yield curve control, as long as the BOJ continues with the current monetary policy.

Bond market functionality has been deteriorating even prior to the introduction of yield curve control in late September. In the BOJ’s bond market survey, the DI for bond market functionality deteriorated to -46 in August 2016, as compared to -25 in February 2015, when the survey first started (see Exhibit 3). Deterioration in the DI was particularly noticeable after the adoption of the negative rate policy.