Taper without the tantrum

While the Bank of Japan didn’t reduce the pace of its bond purchases any further in August, they are much lower now than they were when Yield Curve Control was launched. Nonetheless, bond yields have remained anchored – indeed, ten-year government bond yields recently turned negative again. With no prospect of Japanese yields rising much above zero, and rates elsewhere in the developed world likely to drift higher, we continue to believe that the yen will weaken. That said, a December hike by the US Fed is now looking improbable and, as a result, the yen’s next step down is more likely next year than this. We have adjusted our end-17 yen/dollar forecast to 110 (previously 115). Our end-18 and end-19 forecasts (both 115) remain unchanged.