The yen whipsawed in Monday trade after reports on a potential change to a key agreement between the government and central bank fueled speculation policy makers are moving closer to a hawkish pivot. 

Japan’s currency jumped as much as 0.6% after Kyodo said on Saturday that Prime Minister Fumio Kishida may seek to revise a decade-old accord with the Bank of Japan and consider adding flexibility to the 2% inflation goal, potentially paving the way for an end to its ultra-dovish policy. The yen pared gains after a top government spokesman denied the report.

The existing agreement commits the government and the BOJ to achieving its 2% inflation goal as early as possible. 

The BOJ has long since missed Kuroda’s original timeline of around two years. Still, removal of the phrase would go a step further in recognizing that achieving stable inflation is a longer term goal while implying that factors other than time also need to be considered.

Eoin Treacy's view

Japan has been trying to achieve its inflation target for a lot longer than two years. The challenge in the past was the global economy was going through a long-term disinflationary trend at the same time Japan was going through a deflating property bubble. Attempting to inflate while companies were moving jobs and manufacturing capacity offshore was a challenge. Today, the aging population and depressed consumer demand are headwinds to inflation.

The challenge presented by the current yield curve control mechanism, which only targets the 10-year, is yields on every longer maturity are expanding. The 30-year yield continues to trend higher in a consistent manner.
The Yen continues to pause in the region of the trend mean and a sustained move below JPY133 would be required to signal a return to demand dominance beyond the short term.
The Topix Banks Index continues to hold the breakout to new four-year highs. That’s at least a partial vindication of the BoJ’s efforts to support consumer demand.