Industrial Investment: Tokyo CPI exceeded expectations again, and the 10-year Japanese bond yield exceeded the YCC ceiling

The yield on Japan's benchmark 10-year government bond rose 7 basis points to 0.505% by the end of Friday (July 28) morning trading.Breaking the Bank of Japan's YCC capThe dollar fell more than 0.5 per cent to 138.77 against the yen.There is speculation that Japanese policymakers are discussing easing their tight control over interest ratesDue to the increasing pressure on the Bank of Japan to adjust its policies.

Tokyo CPI exceeded expectations again, and Japanese 10-year bond yields broke through the YCC ceiling

While most economists expected the Bank of Japan to remain on hold this week, the Nikkei newspaper reported early Friday morning that officials would discuss allowing yields to rise "to some extent" above the current ceiling. Then on Friday morning, Japan's Ministry of Internal Affairs announced that, driven by falling energy prices,Tokyo's consumer price index (CPI), which excludes fresh food, rose 3 percent, slowing from 3.2 percent the month before but beating analysts' expectations of 2.9 percent, underscoring the stickiness of underlying inflation.

The Tokyo data, a leading indicator of the national CPI, cast some doubt on the Bank of Japan's view that price growth will slow below its target in the coming months. Data released on Friday showed that cost-driven price growth still had some momentum, calling into question Mr. Ueda's view that inflation would slow by the middle of the fiscal year. Since taking the helm in April, the BoJ governor has repeatedly cast doubt on the sustainability of recent price rises, dispelling speculation of a recent policy shift.

The Bank of Japan will announce its latest policy decision in a few hours, with most market participants expecting no change in its easing policy. Before the Nikkei coverage, all economists polled by Bloomberg predicted that BoJ Governor Kazuo Ueda and his board members would leave the key short-term interest rate at minus 0.1 percent at the end of Friday's meeting. More than 80 percent of the 50 economists surveyed also said the BoJ would keep its rate control mechanism unchanged. However, some economists did not rule out the possibility of adjustment. Economist Taro Kimura said:

"These numbers may suggest that the peak has passed, but the Bank of Japan may raise its average inflation forecast for the fiscal year this week to take into account the previous high data."

The Bank of Japan plans to release its latest price outlook immediately after its meeting on Friday. The central bank's latest forecast is likely to reflect stronger-than-expected price gains. According to people familiar with the matter,The Bank of Japan's policy committee will consider raising consumer inflation expectations for the current fiscal year to around 2.5 percent from an estimate of 1.8 percent in AprilAt the same time, the central bank is likely to keep the price outlook for the next financial year largely unchanged due to a lack of confidence in its ability to achieve its 2% inflation target in a stable manner

Bank of Japan "pivot" speculation sparks panic

Speculation that the Bank of Japan could turn around is reverberating around the world. US Treasury yields extended their gains on Thursday, while 10-year Australian and New Zealand sovereign bond rates opened sharply higher on Friday. The yen has risen against the dollar for a fifth day in a row.

The Nikkei's report early this morning sparked a debate in the US marketminor stormAnother rally in the S & P 500 quickly reversedU.S. investors have been pushing up the prices of risky assets for much of the past year, making them vulnerable to a frightThe pain quickly spread across asset classes as traders began to take seriously the prospect that the last major central bank to resist restrictive policies might buckle

Many international transactions have taken advantage of the extremely low interest rates in the Japanese market, and bulls are also concerned that once Japanese interest rates start to rise,The money will flow back to Japan"This is not just an important event for Treasuries, equities and credit", said Torsten Slok, chief economist at Apollo Global Management Inc. "There is now news of a policy change in Japan, which suggests that the train is about to leave the station".

Much of this tension can be traced back toforeign exchange marketIn the foreign exchange market, the investment playbook is based on the Bank of Japan's loose monetary policy. The yen is the preferred funding currency for carry trades, in which investors borrow yen to finance purchases of high-yielding assets. Sameer Samana of Wells Fargo Investment Research said,The possibility of a change in the ultra-loose stance, and the prospect of a position squaring carry trades, is enough to trigger a jolt"In essence, the presence of carry trades helps investors continue to short the yen in their portfolios and buy risky assets," Samana said. "The market is already very tight and doesn't need much reason to take profits, which will lead to some position squaring."

The S & P 500, which has been rising steadily for six of the past seven months, could still be vulnerable in terms of valuations. The benchmark has a price-to-earnings ratio of about 22 times, almost three points above its 10-year average. The technology-heavy Nasdaq 100 companies have a price-to-earnings ratio well above 30 times. Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management, says:

"Rising interest rates could have a negative impact on global growth and US growth. Similarly, higher bond yields could become a more attractive option for investors and pull money away from equities."

"It all depends on what happens overnight," says Mr. Slok of Apollo. "It's going to be very critical. We haven't seen Japanese interest rates move with the market for the past seven years. Now, if they decide to allow JGB yields to move with the market, when we wake up on Friday morning, no one knows how much JGB yields will rise."

To be sure, some past reports of the BoJ's policy shift have often been proven wrong. According toSociete Generale InvestmentEarlier this month, Bank of Japan officials saw no immediate need to address the side effects of its yield curve control program, although they are expected to discuss the issue, managers said. If early Friday morning reports prove correct, markets could test the BoJ's tolerance, Toru Suehiro, chief economist at Daiwa Securities in Tokyo, wrote in a research note.