BoJ: normalization expectations highest since January - Nomura

Analysts at Nomura explained that the normalization expectations are the highest since January.

Key Quotes:

"Since the media reported on the possibility of BOJ mitigation measures at the next meeting, market expectations of BOJ normalization have been recovering."

"Our BOJ normalization expectation index has risen aggressively, reaching its highest since late January."

"Market expectations for a possible policy tweak by the BOJ have recovered sufficiently. Since our note yesterday, Kyodo and WSJ also reported that the BOJ is mulling countermeasures against negative side effects."

"However, both articles relayed cautious views from unnamed sources, and we still judge that the BOJ is unlikely to raise its 10yr yields at the meeting next week. In fact, Nikkei reported that BOJ officials were frustrated by media reports and that these reports took them by surprise."

"While market reactions were likely not welcomed by the BOJ, the efficacy of the fixed price operations was again confirmed well yesterday."

"Early this year, when the BOJ normalization expectation index was last as high as current levels, the BOJ announced a fixed price operation on 2 February, which reduced market expectations of policy normalization (while a spike in equity market volatility also helped contain normalization expectations)."

"Even amid heightened normalization expectations, this operation was again very effective this time."

"After the introduction of YCC, 10yr JGB yields have been less sensitive to the amount of BOJ’s JGB purchases, and we estimate the termination of YCC could appreciate JPY by 3-5%."

"The median expectation among BOJ watchers of the size of JPY appreciation when the BOJ raises yields was also 5%, according to a Bloomberg survey."

"Any new forward guidance to point toward more scope for 10yr yields to rise would risk eroding the credibility of YCC but, as long as the fixed price operation is effective, upside risks of 10yr yields can be limited (and thus upside risks of JPY)."

"Then, the JPY weakness trend can sustain after the short-term appreciation. It is crucial for the BOJ to maintain the credibility of the YCC framework to avoid further adverse market reactions."