JPY Swaps: Swaption volatility seen tighter; Longs given as inflation cools

Japan flag and Tokyo buildings
10-20y JPY swaps saw receiving as inflation in March has cooled. BNPP has taken a look at the swaption volatility ahead of the BOJ.

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  • BOJ to retain existing monetary easing policies

  • 1y10y-1y20y swaption volatility seen tighter – BNPP

  • 10-20y given as inflation cools

  • New issues


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BOJ to retain existing monetary easing policies

Barclays has expressed its view on the upcoming BOJ MPM in a research piece released yesterday. It said it expected the BOJ to vote unanimously next week to retain existing monetary easing policies centred around yield curve control (YCC) at the first MPM to be held under new leadership.


Given the dovish tone of new Governor Ueda and his deputies at their inaugural press conference, Barclays believes the central bank is highly unlikely to surprise the market with policy revisions. The bank sees three main focal points during the meeting:



  • Revisions to the Policy Board’s real GDP growth and core CPI inflation forecasts in the quarterly Outlook Report to be released after the meeting.

  • How US and European credit concerns affect the BoJ’s

    economic assessment.

  • Whether there will be any mention of conducting a comprehensive policy assessment in the future.


Barclays still believes that the BOJ would likely start revising YCC in June. However, if it instead opts to revise policy with the release of a quarterly Outlook Report, then such revision would happen in July. After the YCC revision, the BOJ will likely replace it with easing measures revolving around a combination of the zero-interest rate policy (ZIRP) and “duration effects” to curb market expectations for monetary tightening through a commitment to sustain a low interest rate environment through ZIRP, according to Barclays.


Such an approach would be similar to YCC, which is to stabilize long-term yields at a low level until deflation concerns are lifted. However, it differs in that it would act on long-term yields through policy rate expectations without impacting directly on JGB supply and demand. This would help curbing unwanted side effects for a corresponding increase in sustainability.



1y10y-1y20y swaption volatility seen tighter - BNPP

Elsewhere BNP Paribas feels that pricing-in the YCC adjustment is tricky. According to a strategy piece released on Thursday, the bank thinks there is likely “relief buy” at long-awaited better yield even if the YCC is not officially removed. In addition, the BOJ is prepared to intervene in the market if 10-year yield volatility rises aggressively.


The team recalled in the piece that the swaption volatility for 10-year tail jumped over 20-year tail after the surprise move by the BOJ to adjust YCC in December 2022, reversing the traditional relationship between them. Since then, the spread of 1y10y-1y20y went through some tightening and widening as the expectations for the YCC adjustment swung and market went through a painful short cover.


Nevertheless, BNP expects the relationship of 10- and 20-year tail volatilities to return to historical levels, and 20-year tail volatility would be higher than that of 10-year. The team reckoned there would be more room for tightening although the spread has already tightened from its peak. It therefore recommended to eye for opportunities on a tighter 1y10y-1y20y swaption volatility.



10-20y given as inflation cools

Higher-than-expected number of jobless claims in the US was already a good reason for demand for JPY rates today. Lower-than-expected inflation data, on the other hand, has backed further rally in the JPY rates market.


Official data released earlier today showed that inflation in Japan cooled from 3.3% in February to 3.2% in March, matching economists’ expectations.


JGB future was up by 30-ticks at 147.77 near market close, and the yield on the benchmark 10-year JGB was marginally lower at 0.464%.


Swap trading has been mostly around the 10- to 20-year area of the curve with traders still cautious ahead of the BOJ MPM. A dealer reported receiving in 10-year at down to below 0.64% in the afternoon session, compared to previous close of 0.65%. 20-year went through 1.0475% near market open before traded in a tight range around 0.5bp lower of 1.05% throughout the day. 10s/20s swaps steepened up by a tad to 40.75bps, or the steepest since late-March.



New issues

  • Aozora Bank issued JPY10bn in 00.43% April 27, 2026 bonds.


  • Sompo Holdings sold JPY70bn in 0.479%, April 27, 2028 bonds at JGBs + 32bps.