BOJ Governor Kazuo Ueda said at a press conference that long-term interest rates should be determined by financial markets. The Bank of Japan announced its bond buying plans through the first quarter of 2027 to maintain flexibility and predictability. The Japanese economy is slowly recovering, but there are still some weak trends. Easy monetary conditions will help support this recovery. The Bank is ready to raise interest rates if the economy and prices improve. However, the current trade situation is uncertain, which affects policy aimed at reaching a stable price target. Right now, the USD/JPY exchange rate is down slightly by 0.1% at 144.64. This indicates little change from the previous policy decision. Ueda emphasized that the Bank of Japan wants to allow government bond yields to fluctuate based on supply and demand, rather than enforcing strict control. However, they still have detailed buying plans set until early 2027. This approach aims to reassure investors that there won’t be sudden changes in the near term. There’s a balance being created—offering more flexibility while keeping broader expectations stable. From our perspective, this marks a slight shift in how monetary authorities view risk and control. We can no longer expect bond markets to stay tightly controlled. The central bank is shifting toward a looser framework, but it won’t be completely hands-off. Setting bond buying intentions years in advance suggests that any policy changes will happen gradually. This will help us adjust our future rate expectations and understand when longer-term yield changes might impact shorter-term rates. The implication is that investing further down the yield curve may require a more careful approach, with frequent adjustments. The reference to weak trends during the recovery is notable. Some spending areas remain soft, and companies may take time to pass on cost increases. The ongoing loose monetary setup keeps liquidity high, which currently stabilizes yields. From a pricing perspective, this reduces the need for drastic interest rate hikes. However, Ueda’s mention of possible rate increases “when the economy and prices improve” adds complexity to our analysis. The shift won’t hinge solely on inflation; broader economic conditions also need to improve. Without clear signs of wage growth or increased consumption, tightening policy could face challenges. We should reconsider our assumptions about the pace of economic progress. Looking at the foreign exchange signal, the slight decline in USD/JPY after the policy update shows that the markets reacted calmly. Expectations were mostly met, but this doesn’t mean adjustments won’t happen. For now, we don’t need to change our positions drastically. However, it’s important to note the narrowing reaction range, which may lead to sudden moves if forward guidance changes unexpectedly. Watanabe pointed out that trade developments are unpredictable. This leaves room for geopolitical shifts to quickly alter rate expectations. Significant changes in the global supply chain or export volumes, especially in tech, could influence Bank forecasts more rapidly than typical indicators. At this point, we believe a cautious approach is best for directional bets, focusing more on pricing volatility changes around policy events. Instead of chasing breakouts, maintaining flexibility with limited risk seems sensible. Timing sensitivity could be just as profitable as making clear bets.

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