The Bank of Japan announced today that it will allow 10-year yields to rise above the 0.5% ceiling – which it says it is retaining – to a new “just-in-case” cap of 1.0%. With signs mounting of a virtuous cycle between inflation and wages, the chances of the Bank lifting its short-term policy rate as well are rising. However, we still think that a slowdown in inflation will convince the Bank to refrain from further policy tightening over the coming months.
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