JPY Swaps: BOJ seen to widen YCC band to 100bps; Inflation outlook

There has been growing expectations about a YCC tweak this week. BNPP said the central bank might widen the band to 100bps.

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  • JGB future knee-jerked higher after service PPI

  • BOJ to widen YCC band to 100bps - BNPP


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JGB future knee-jerked higher after service PPI

Service inflation in June was up by 1.2% year-on-year, down from 1.7% in May and missing economists’ forecast of 1.5% of growth. This was also the slowest growth since 2020.


JGB future was knee-jerked 8-ticks higher immediately after the data, but such move lacked momentum especially after the USD rates market closing in the reds on the previous day.


The lead bond future then fell by 4-ticks before being marked 2-ticks lower at 148.17 in mid-morning domestic trading. The yield on the benchmark 10-year JGB was half a basis point higher at 0.466%.



BOJ to widen YCC band to 100bps - BNPP

A dealer said the fading demand for JPY rates has also been driven by growing prospect of a YCC tweak. Indeed, BNPP, MUFG and Goldman Sachs have already expressed their views about a possible YCC tweak this week.


In a strategy report released on Tuesday, BNPP re-iterated its stance, saying that the BOJ would likely widen the YCC range for the 10-year rate to ±1%. The bank believes that the move is justified as it would be something that is not monetary tightening under the rising inflation expectations scenario while containing risk to financial intermediation. “The more important reason behind the decision, in our view, would be concern over the risk of further yen depreciation and the changing inflation outlook,” it added.


Regarding the July outlook report, which will be published along with the meeting statement, BNPP expects the three-year projection to be raised from 1.8% to 2.5% for FY2023, from 2.0% to 2.1% for FY2024, and from 1.6% to 1.7% for FY2025.


BNPP has already expressed the above views via entering a 5s/10s JGBs flattener earlier this month at 34bps. The slope steepened up to its recent high of above 35bps today.


Flow wise, there was very light paying in 10-year and it was last traded 0.25bp higher at 0.62%. 2s/10s swaps were little changed at just below 56.5bps.