Analysts at Societe Generale assign a 60% probability for no further yield curve control (YCC) revisions by the Bank of Japan (BoJ) in 2023

Key Quotes:

“We think Japan will struggle to put through its base salary rise ex. regular/annual increase in excess of 2% in the traditional spring round of wage negotiations. In addition, with the Fed and ECB likely to stop hiking rates, and in view of the BoJ’s new measures, we think the deterioration in bond market functioning may stop this year. Moreover, the BoJ's likely rapid exit from monetary easing would have significant disadvantages from the perspective of fiscal stability.”

“We also explore two sub scenarios: ‘YCC attack’ (30% probability) and ‘overcoming deflation’ (10% probability). The former assumes that the range of fluctuation permitted for the 10-year JGB yield is widened from ±50bp to ±75bp. In gauging this scenario, we focus on the shape of the JGB yield curve and the BoJ’s Bond Market Survey. In our second scenario, we assume that the BoJ raises its short-term and long-term interest rate targets to 0% and 0.25% respectively and maintains its long-term interest rate range at ±50bp. To gauge this scenario, we focus on the spring round of wage negotiations, the Domar condition and the GDP deflator.”