There have been persistent rumors lately that the BoJ would “tweak” its yield curve control (YCC) mechanism when it meets tomorrow. What does it mean? What is the possible impact of this on the markets? And how will the market react if the BoJ doesn’t act?
Rumors are just that: rumors. Now, The consensus among economists is that the BoJ will not change its policy. But “no change” isn’t the same as “policy neutral”. The BoJ marketed its YCC program as policy neutral the last time it tweaked it.
What happened?
The yen’s weakness is driving this, despite the Japanese authorities’ insistence to the contrary. A weaker yen can be good for the economy, but it can also lead to inflationary pressure. Japan wants a weaker Japanese yen but not to the point that it affects monetary policy.
As the USDJPY pushed above 140 recently, Japanese officials have come out to say they were “monitoring” the situation. The implication being that authorities don’t want the currency pair to keep ascending too much. The BoJ would have to intervene if the currency were to change direction. Minor fluctuations are not enough.
The Big Guns
Last year ,…
