JPY: Rising global yields a signal of continued yen weakness - BTMU

Analysts from The Bank of Tokyo-Mitsubishi UFJ, see some bullish risks for the USD/JPY pair amid rising global yields and the yield control policy of the Bank of Japan. 

Key Quotes: 

“A key theme that continues to run in the financial markets is the upturn in long-term yields globally. The UST bond 10-year yield is up 13bps this week; the German Bund is 12bps higher; the Gilt yield is 16bps higher. By contrast, the 10-year JGB yield is a mere 2bps higher. The BoJ can celebrate this as clear evidence that its strategy of ‘Yield Control’ is working and the divergence in global yields relative to Japan if sustained will certainly help to weaken the yen – USD/JPY is 1.5% higher this week and 4.0% in October to date.”

“The BoJ would certainly like to see some renewed yen depreciation. Data today will worry Governor Kuroda. The national annual CPI rate officially targeted by the BoJ remained at -0.5% in September but the BoJ favoured measure, stripping out energy as well fell from 0.4% to 0.2%, below market expectations. Further upward pressure on global yields would likely mean the BoJ would have to up the pace of JGB purchases and would weaken the theory that the BoJ is trying to taper in disguise.”

“Although that view is probably correct, a period of aggressive easing that emphasises policy divergence would help to encourage further yen weakness from current levels, at least over the near-term. The revival in Japanese share prices will help as well. The Topix Index is 5.3% higher in October, one of the best performing major equity indices in the world. The 50-day moving average for USD/JPY is about to cross above the 100-day moving average, which could add further upward momentum toward the 200-day moving average of 107.27.”