The currency market, not the bond market, could be the driver of the Bank of Japan's next policy change

　　The yen could replace bonds as the main driver of further monetary policy changes by the Bank of Japan.

　　Although the BOJ explicitly cited issues with bond market operations as the reason for the adjustment of the yield curve control (YCC), bond liquidity has generally been stable since the most recent policy adjustment on July 28. The yen has depreciated more than any other major currency in the past six months and is trading at levels similar to those at which the Japanese JPN authorities intervened in the market last year.

　　Ueda's meeting with Japan's prime minister this week has sparked speculation that another policy change is imminent as the government considers fiscal support to help households and businesses cope with inflation. The fact that central banks have done nothing about yields soaring to nine-year highs supports this view.

　　Kaoru Inoue, interest rate strategist at SMBC Nikko Securities, said: "The yen is the determinant of the boj's tolerance for higher yields. If the yen weakens significantly, the BOJ is likely to change policy again in the relatively near future."

　　Takuji Ada, chief Japan economist at Credit Agricole, said whether the BOJ will have to change the YCC parameters further depends on U.S. Treasury yields. "My base case is that once the Federal Reserve starts cutting rates next year, US yields will either stay around current levels or fall," he said. This will give the boj some breathing room to continue with its current easing framework."