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27 Mar 2013
Forex Flash: USD/JPY could edge higher as a result of JGB yields – UBS
FXstreet.com (Barcelona) - The yen has resumed its downward trajectory overnight following media reports that the BoJ is preparing to merge its two JGB buying programs into one. Rinban operations started decades ago, but the Asset Purchase Program began life only in 2010, and it seems the time is ripe to consolidate them. The intention is make the scale of the BOJ's easing programs more transparent, but there are practical implications too as we discuss below.
First we should stress that this has little to do with a desire to circumvent the "banknotes rule". This rule in theory still prevents the BoJ from holding more JGBs than the value of bank notes in circulation. However, the rule has already been sidestepped. JGBs purchased by the Asset Purchase Program are have been exempted from the rule from the outset for reasons which remain somewhat mysterious.
According to Research Analyst Gareth Berry at UBS, “The biggest consequence of combining both programs though is that it could give the BoJ far greater freedom to purchase a wide range of tenors.” By design, APP purchases are concentrated at the very front end of the JGB curve in the 1-3y sector, whereas Rinban operations can buy all the way out to the 30y point. A combined program is likely to be more Rinban-like in its freedom to buy across the curve. That means lower JGB yields at the long end, and a higher USD/JPY seem likely as a result.
First we should stress that this has little to do with a desire to circumvent the "banknotes rule". This rule in theory still prevents the BoJ from holding more JGBs than the value of bank notes in circulation. However, the rule has already been sidestepped. JGBs purchased by the Asset Purchase Program are have been exempted from the rule from the outset for reasons which remain somewhat mysterious.
According to Research Analyst Gareth Berry at UBS, “The biggest consequence of combining both programs though is that it could give the BoJ far greater freedom to purchase a wide range of tenors.” By design, APP purchases are concentrated at the very front end of the JGB curve in the 1-3y sector, whereas Rinban operations can buy all the way out to the 30y point. A combined program is likely to be more Rinban-like in its freedom to buy across the curve. That means lower JGB yields at the long end, and a higher USD/JPY seem likely as a result.