Highlights:

• The ongoing monetary expansion of the Bank of Japan (BoJ) has become a strong outlier internationally, sparking worries of forthcoming market turmoil if recovering inflation forces BoJ is into an abrupt exit from its yield curve control (YCC). However, we deem this not very likely.
• While energy prices and depreciation of the yen will lift inflation rate to about 4% yoy by the turn of the year this supply shock does not trigger a sustainable, virtuous wage-price cycle the central bank is aiming at. But it will likely be sufficient for the BoJ to begin adjusting its policy stance cautiously over the course of 2023. 
• Short- and medium-dated Japanese government bond yields are seen to track the monetary policy steps upwards. By contrast, very long-dated bond yields are being pulled down by the global yield environment, triggering a flattening of the very long end of the curve. The yen will benefit from a declining yield gap vs. the US.
   

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