It may be necessary to allow moderately higher JGB yields. The changes in yield curve control can be interpreted as first steps in this direction.

If inflation can eventually be brought back to the 2% target with moderately higher yields, this may end up being JPY positive. Then Yen's yield disadvantage will be less significant (especially if other central banks cut their rates).

However, real yields cannot be too high for a JPY positive outcome. Otherwise, fiscal and/or inflation problems and significant JPY weakness loom.

We still think that a positive outcome for the JPY is likely, but see risks on both sides for the Japanese currency.