This report discusses the market speculation about when the BoJ would tighten policy and take rates positive. It notes that there has not been much volatility in JGBs or $Yen – they have been correlated to USTs and the USD Index respectively. The money market strip has traded in a pretty tight range and the market currently prices 30p of rate hikes by Dec24
Despite all the ongoing speculation, this brief report highlights that there are two important headwinds for the BOJ to tighten policy:
1) Non-cyclical continued poor Debt Dynamics
2) A deteriorating economy
The report, that builds on previous research on Japanese debt dynamics, shows how the BoJ is in a tough spot and their window to change policy is likely to be shut. This leads to the possibility of trends restarting in financial markets that should offer interesting opportunities.