JPY Swaps: 10-20y given on more dovish BOJ remarks

BOJ Front 2
The JPY rates market was weaker in the morning but rallied after dovish BOJ. 10-20y swaps were offered and 10s/20s flattened out.

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  • JGB future erases losses after dovish BOJ

  • 10-20y given; Sporadic belly bid


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JGB future erases losses after dovish BOJ

JGB future has outperformed the selloff in the USD rates market. It traded down 9-ticks in the morning session, but erased all the losses to finally close the day 16-ticks higher of 148.67, after spiking to as much as 30-ticks in mid-afternoon domestic trading.


The late day rally in JPY rates was driven by more dovish remarks from Kuroda. Earlier today, several key BOJ officials including Kuroda, Himino and Uchida appeared in Parliament. Governor Kuroda remained confident about his ultra-loose monetary easing policy and said it had boosted economy and prices, and so its benefits had exceeded the costs. He again said it was appropriate to continue with monetary easing, although Deputy Governor Uchida mentioned that the central bank wouldn’t rule out any policy option if needed. Uchida also pointed out the risk of not controlling the yields, as BOJ would lose JPY50trn if 10-year yield hit 2%. Kuroda added that he expected real wage losses to shrink but the existing path is leading to the country hitting its 2% inflation target.


Kuroda was clearly dovish again, and the mentioning of potential losses if 10-year yields hit 2% indicated that the central bank would prefer to safe-guard its YCC policy.


However, BNP Paribas (BNPP) said in a research piece released yesterday that further YCC adjustment was still not off the table.


Currently, the bank has less conviction in its call that the BOJ would adjust the YCC again in June as upward pressure on long-term rates has subsided due to banking sector concerns in the US and Switzerland. The team believe the bias of the incoming BoJ governor would be to return to a policy centred on short-term policy rate. However, even if long-term rates remain low, BNPP think it is possible for the BOJ to adjust the YCC further down the road to avoid problems in the future, particularly given the high uncertainty over the inflation outlook globally.



10-20y given; Sporadic belly bid

The dovish stance has inevitably prompted receiving interest in swaps. A dealer reported offered-side flows in 10-year at down to 5.25bps lower of 0.5775%. It continued to trade in a tight range around 0.58% after the bell ring. Receiving has also extended to 20-year where it traded down to 4bps lower of 0.97% in the afternoon session.


10s/20s swaps flattened out by 1.5bps to 39bps.


The belly saw some reasonable amount of trading activities too. 5-year, for example, traded 1-2bps lower although there was some sporadic paying at 2.5bps higher of 0.29% on the day.