Overview
Bank of America Global Research has flagged a shift in market sentiment toward a more dovish outlook for Japan's monetary policy, driven by two recent developments that market participants interpret as supportive of easier settings. At the same time, the bank cautioned that downside risks to the yen limit how long authorities can afford to remain passive.
What changed
According to BofA, market views were reinforced by a press report describing a February 16 meeting between Prime Minister Sanae Takaichi and Bank of Japan Governor Kazuo Ueda in which Takaichi reportedly expressed reluctance to pursue further rate hikes. That report coincided with yen depreciation and a decline in Japanese government bond yields, with the effect clearest in the intermediate portion of the curve.
Separately, the nomination of two new BoJ Policy Board members - Toichiro Asada and Ayano Sato - who are broadly seen as dovish, contributed to renewed selling of the yen and a steepening at the super-long end of the JGB curve, BofA said.
Market reaction and dynamics
These signals, taken together, point to a near-term trajectory of yen weakness and further curve steepening. BofA notes that markets have priced a softer policy stance in response to the political signals and the personnel changes on the BoJ board.
BofA's caution and forecast
Despite the immediate market moves, BofA warned that allowing the yen to fall without restraint would carry both political and financial risks. Public concern about rising prices remains elevated, and sustained weakness in the currency could ultimately push long-end yields higher - a development that might compel the BoJ to tighten policy.
The bank argued that attempting to rely solely on foreign-exchange intervention to defend the yen while maintaining low interest rates is not a realistic long-term strategy, particularly if market participants view postponed policy normalization as the underlying cause of currency weakness.
Reflecting these dynamics, BofA revised its USD/JPY expected range higher to 153-161 from 150-158. The bank added that further depreciation toward the 160 level could reignite calls for additional BoJ tightening, even though the immediate threshold for a rate hike has become higher.
Implications
The interplay between political signaling, central bank personnel shifts, and market moves in FX and JGB markets creates a policy conundrum - easier perceived monetary settings may produce near-term market easing, but unchecked currency depreciation and higher long-term yields could force a policy reversal.
Observers should watch how authorities balance FX intervention, communication, and the timing of any policy normalization as these choices will determine whether current dovish signals persist or give way to action to defend the currency and financial stability.