April 6th, Danske Bank said that we think the Bank of Japan is more likely to adjust the yield curve control (YCC) before regular rate hikes, or through the following two ways: widen the YCC range to 0+/- 100 basis points (currently 0+/-50 basis points); shorten the target maturity of treasuries from 10 years to 2 years or 5 years.
Both are essentially monetary policy tightening, with the former more likely to improve market functioning and therefore more likely in the short term. We expect the BoJ to adjust the YCC in the second quarter and may raise the policy rate by 10bps to 0%. Overall, USDJPY appears to be fundamentally overvalued, and with the base case for monetary policy tightening by the Bank of Japan in Q2, the pair is expected to fall to 125 in 3 months.
