Analysts at Nordea Markets point out that in Japan, the 10yr bond yield has now reached the zero-mark, which limits the downside potential for JPY rates due to the yield curve control from Bank of Japan (-0.2 to +0.2 range, effectively probably even tighter).

Key Quotes

“It is not even unthinkable that Bank of Japan will start selling bonds, if we get closer to the bottom of that range. After all the YCC was probably introduced, as Bank of Japan felt that it was running out of assets to buy.”

“Hence, if the inflation pressure abates further due to the slowing growth momentum worldwide, then Bank of Japan is likely to get higher real rates (also in relative terms) and there is not much they can do about it (lower inflation, but YCC keeps 10yr point at bay). This may implicitly lead JPY higher, if real rates matter (on charts it looks like they do).”

“A little down the line a scope for new policy easing / policy panicking from BoJ may arise, as wage growth looks set to slow. This comes on top of the already potentially rigged level for 2018 wage growth, that Shinzo Abe (partly) admitted to last week.”