Bank of Japan Governor Kazuo Ueda Leaves Options Open, Will Give No Preemptive Warnings

Bank of Japan Governor Kazuo Ueda was stoic in declaring the BOJ is to keep its options open at the follow up press briefing after the central bank’s two-day meeting. Perhaps in deference to the Fed and ECB telegraphing intentions he added that policymakers were unlikely to give an explicit warning of an impending rate hike. “There isn’t much likelihood of us suddenly announcing that we’ll raise rates a month in advance,” Ueda said. Earlier the Bank of Japan maintained existing policy as widely expected. The BoJ kept unchanged its -0.1% target for short-term interest rates, and 0% for the 10-year government bond yield unanimously. Previously the BoJ adjusted the settings by shifting the hard ceiling from 0.50% to 1.00% in the yield curve control band of +/- 0.50%.

Bank of Japan Governor Kazuo Ueda

Markets remain on their toes after he didn’t rule out policy normalization at any of the upcoming meetings, while insisting he first needs to see more evidence that the BOJ will achieve its price stability target. Swaps traders have priced in almost 90% odds of a rate hike by the April meeting, around 60% for March and close to 45% for the January gathering.

The yen weakened fell as Ueda spoke. Japan’s currency fell as much as 1.3% to a one-week low against the dollar, the Nikkei 225 equity index rallied to a two-week high. The Nikkei 225 closed up 1.4%. Treasury 10-year yields slipped about two basis points and the German 10-year bund dropped five basis points as yields across the euro area fell.

Rate Spread between Fed, ECB and BoJ

The benchmark 10-year government bond (JGB) yield fell as much as 5.5 basis points from its intraday high to 0.63% as expectations of a looming rate hike cooled a touch. That compares with a peak of 0.97% for the yield in the wake of the late October BOJ meeting when Ueda added more flexibility to yield curve control.

“The BOJ will end the negative rate while maintaining its easing framework,” said Mari Iwashita, chief market economist at Daiwa Securities Co. “A rate hike beyond that will face a high hurdle in terms of politics and economic fundamentals. To do so will mean the 2% target is surely being met, which is different from saying it has come within sight.”

BOJ December 2023 Monetary Policy Decision Statement

“The Bank will maintain the target level of 10-year Japanese government bond (JGB) yields at around zero percent, it will conduct yield curve control with the upper bound of 1.0% for these yields as a reference and will control yields mainly through large-scale JGB purchases and nimble market operations.”

BOJ Monetary Policy Highlights

  • Keeps short-term interest rate target at -0.1%
  • Keeps 10-year JGB yield target around 0%
  • Kept reference range to 1.0% point up and down each around its 10-year JGB yield target
  • YCC decision unanimous
  • BOJ makes no change to forward guidance
  • Economy has recovered moderately
  • Private consumption continues to rise moderately
  • Y/y rate of rise in CPI slower than a while ago mainly due to effects of pushing down energy prices
  • But CPI has been around 3% recently due to pass-through of cost increases to consumer prices
  • Inflation expectations have risen moderately
  • Economy likely to continue recovering moderately for time being
  • Japan economy projected to continue growing at pace above potential growth rate
  • Rate of rise in CPI likely to be above 2% through fiscal 2024
  • Thereafter, rate of rise projected to slow down
  • Underlying CPI inflation likely to increase gradually toward achieving price stability target
  • Japan’s economy likely to continue recovering moderately
  • Inflation expectations heightening moderately
  • Trend inflation likely to gradually accelerate
  • Inflation likely to move above 2% then slow pace of increase thereafter
  • Uncertainty regarding Japan’s economy, prices remain very high
  • Must scrutinise FX, market moves and their impact on economy, prices
  • BOJ makes no change to its forward guidance

Conduct of yield curve control

While significantly increasing the amount of JGB purchases, the Bank previously expanded the range of 10-year JGB yield fluctuations from the target level: from between around plus and minus 0.25 percentage points to between around plus and minus 0.5 percentage points.

The Bank will offer to purchase 10-year JGBs at 0.5 percent every business day through fixed-rate purchase operations, unless it is highly likely that no bids will be submitted. In order to encourage the formation of a yield curve that is consistent with the above guideline for market operations, the Bank will make nimble responses for each maturity by increasing the amount of JGB purchases even more and conducting fixed rate purchase operations.

Source: BoJ, Reuters

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