At its monetary policy meeting on the 31st, the Bank of Japan decided on further flexibility in its yield curve control (YCC) policy. Combined with the upward revision of the price outlook, the market believes that we have made a step forward towards achieving the 2% price stability target and normalizing monetary policy, but exchange rate trends may become a turbulent factor in future policy management. There seems to be a gender as well.
By making YCC more flexible, the Bank of Japan has allowed transactions that exceed the long-term interest rate of 1%. The guidance target remains at around 0%, but the upper limit is set at 1%. We will suspend continuous limit price operations every business day, and if we decide to do so, we will announce the yield level, schedule, amount, etc. in advance. Many market participants had expected a revision that would expand the upper limit on fluctuations to something like 1.5%.
Governor Kazuo Ueda was asked at a press conference about the distance to achieving the price target, and said, “It is true that the probability of achieving the price target is increasing slightly.” In the Outlook for the Economic and Price Situation (Outlook Report), the consumer price outlook for fiscal 2023 and fiscal 2024 has been raised, and it now appears that the consumer price index will remain well above the 2% target for three years starting in fiscal 2022. In addition to the fact that YCC has become a mere shell, there is an increasing view in the market that progress has been made toward normalization, including the early lifting of negative interest rates.
Morgan Stanley MUFG Securities’ Japan Chief Economist Tsuyoshi Yamaguchi said in a report that his expectation that the negative interest rate policy and long-term interest rate target will be abolished at the same time at the decision meeting in January next year remains unchanged, but he added, “This YCC revision and outlook report will not change. “The large upward revision to the inflation outlook in 2017 has made this more likely.”
Photographer: Kiyoshi Ota/Bloomberg
In the market, many believe that the reason behind the Bank of Japan’s decision to revise the YCC is that, as the government works to counter high prices, it is an attempt to halt the depreciation of the yen, which is directly linked to a rise in import prices.
Mr. Yamaguchi also said, “It is highly likely that the Bank of Japan was forced to consider the risk of further depreciation of the yen due to continuous limit operations of 1%, rather than considering the functioning of the government bond market.” Point out.
Governor Ueda said at a press conference that large exchange rate fluctuations could have a major impact on the economy and prices, adding, “If it has a major impact on our price outlook, then it would be a change in policy.” “We can connect,” he said. He also mentioned the effect of boosting demand through increased exports due to the weaker yen, and the possibility that continued rises in import prices could lead to higher inflation expectations.
Kyohei Morita, chief economist at Nomura Securities, pointed out that the upper limit on the range of permissible fluctuations in long-term interest rates, as expected by some market participants, was not raised. He called the Bank of Japan’s recent response a limited YCC revision, and expressed his view that it “demonstrates the Bank of Japan’s intention to tenaciously proceed with monetary easing under the YCC framework.”
Although the Bank of Japan indicated that it would allow long-term interest rates to exceed 1% through the YCC revision, it once again indicated that it would continue easing, and after the meeting, the dollar was close to 151 yen for the first time in a year. The yen is depreciating to this level. Amid growing awareness of the growing relationship between exchange rate fluctuations and monetary policy, it is expected that the foreign exchange market will test the Bank of Japan’s easing stance.
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2023-10-31 13:45:04
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