As the world’s major central banks convene monetary policy meetings this week, the Bank of Japan is likely to decide to maintain its large-scale monetary easing.
The focus of the Bank of Japan decision-making meeting to be held on the 27th and 28th is whether or not to review the yield curve control (long-term interest rate control, YCC). According to several people familiar with the matter, the BOJ sees little need at this point to address the side effects, such as market and financial intermediation functions, by revising the YCC. However, some policy committee members are calling for the early revision or abolishment of the YCC, and the review is expected to become a subject of discussion.
The BOJ maintains that there is no noticeable distortion in the shape of the yield curve, and that there are no major problems with the functioning of the bond market. Amid positive developments in the Japanese economy, such as the realization of high wage increases, there is little need to further increase the sustainability of monetary easing through the revision of the YCC, and some are concerned about the risk of being misunderstood as the first step toward policy normalization.
BOJ recognizes little urgency to deal with YCC side effects at present
Bank of Japan Governor Kazuo Ueda
Photographer: Kiyoshi Ota/Bloomberg
Both the US Federal Reserve (Fed) and the European Central Bank (ECB) are expected to raise interest rates by 25 basis points at their meetings this week. There is also the possibility that the pressure to depreciate the yen will increase again in the foreign exchange market, as people will once again be aware of the difference from the Bank of Japan, which continues to implement large-scale monetary easing.
FOMC, ECB to hike rates further, BOJ to maintain status quo – policy decision this week
A Bloomberg survey of 50 economists conducted between March 12 and 18 found that nine economists, or 18 percent, expected the YCC to be revised or eliminated at the meeting. In the previous survey, before the June meeting, 35% expected a policy revision in July. 60% answered that it would be a “surprise” if the YCC was revised or abolished this month.
Bank of Japan’s July policy revision forecast recedes, governor continues to be dovish – survey
Masazumi Wakatabe, former BOJ deputy governor and professor at Waseda University’s School of Political Science and Economics, told Bloomberg Television on Thursday that the BOJ was not sure whether the current inflationary momentum would continue beyond next fiscal year and was expected to keep policy unchanged at this meeting. However, he added that as long as the BOJ continues its YCC policy, market speculation about the possibility of fine-tuning it will always follow.
Bloomberg Economics view
“Governor Ueda has repeatedly mentioned the need to continue with accommodative policies. If the YCC were to be amended now, the market could perceive the BOJ as suddenly becoming more hawkish, which would damage its reputation for polite communication.”
Taro Kimura Senior Economist
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With consumer prices (core CPI excluding fresh food) hovering above the Bank of Japan’s target of 2%, there are strong calls in the market for an early review of the unusual YCC, which guides long-term interest rates to low levels. A Bloomberg survey also found that 28% of economists expect a policy revision at the October meeting, with nearly 60% expecting it to be within the year.
Rihito Koike, a senior researcher at Sompo Institute Plus, predicted that the YCC would have a large side effect within the current framework of monetary easing, and that it will be revised within this year. “The market is prepared for the YCC to be revised at any time,” said President Kazuo Ueda.
At this meeting, the outlook for the new economic and price developments (outlook report) will also be discussed. According to people involved, the core CPI outlook for fiscal 2023 is likely to be significantly revised upward from the previous 1.8% year-on-year increase to around 2.5%. On the other hand, the outlook for fiscal 2024 and 2025 will be only a small revision from the current 2.0% and 1.6%.
Bank of Japan likely to revise price forecasts for FY2023 to around 2.5%
the time is ripe
“We think the time is ripe to start revising the YCC,” said Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management. “The YCC amendment is not a full-fledged turn toward tighter monetary policy, but it sets the stage for narrowing the monetary policy gap,” she said.
As a result, the pressure on the yen to depreciate will ease, the stock market will become less dependent on the depreciation of the yen, which has the effect of boosting corporate earnings, and bond yields will rise slightly toward around 1%, possibly resolving distortions in the Japanese government bond market, he said.
In the bond market, 10-year government bond yields continue to hover below the Bank of Japan’s upper limit of 0.5%. There have been no bids for several months for the BOJ’s unlimited purchase of government bonds at a specified yield.
Swap rates have fallen after Bloomberg reported last week that the BOJ could keep the YCC on hold, signaling fading market expectations of a policy revision.
Meanwhile, implied volatility on Japanese government bond futures rose to a three-month high, suggesting investors are wary of bond market volatility. Risk reversals, which reflect the views of market participants in the dollar/yen options market, indicate that currency traders are preparing for a fall in the dollar/yen exchange rate next week.
2023-07-24 23:07:00
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