Bank of Japan Maintains Stance Leaves Negative Rates and YCC 1% Ceiling Rate Unchanged

The Bank of Japan at its December monetary policy meeting 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%. The yen weakened, a move higher for yen crosses. 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. 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.

BOJ October 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

Inflation Forecasts Raised last meeting:

  • Board’s core CPI fiscal 2023 median forecast at +2.8% vs +2.5% in July
  • Board’s core CPI fiscal 2024 median forecast at +2.8% vs +1.9% in July
  • Board’s core CPI fiscal 2025 median forecast at +1.7% vs +1.6% in July
  • Board’s real GDP fiscal 2023 median forecast at +2.0% vs +1.3% in July
  • Board’s real GDP fiscal 2024 median forecast at +1.0% vs +1.2% in July
  • Board’s real GDP fiscal 2025 median forecast at +1.0% vs +1.0% in July

BOJ quarterly report last meeting:

  • Japan’s economy likely to continue recovering moderately
  • Inflation likely to slow, then re-accelerate as wages rise, inflation expectations heighten
  • Uncertainty over Japan’s economic, price outlook very high
  • Must be vigilant to financial, fx market moves and their impact on Japan’s economy, prices

BOJ quarterly report on risks:

  • Uncertainty over Japan’s economy, prices is extremely high
  • Need to closely watch financial, currency market moves, their impact on Japan’s economy, prices
  • Risks to price outlook skewed to upside in fy2023
  • Must closely watch whether favourable cycle of wage growth, prices will strengthen
  • Risks to economic outlook generally balanced in fy2023 and fy2024, but skewed to downside for fy2025
  • There is possibility wage growth may not strengthen as expected next year onward, causing prices to deviate downward

BOJ governor Ueda conference (Updated):

  • We are yet to foresee inflation reaching 2% in a stable manner
  • Japan economy is recovering moderately
  • Wages and price setting behavior has been more positive recently
  • (clarifies about interview here) I said that we need to patiently continue easy policy
  • We could consider ending yield curve control and modify negative interest rate policy
  • But only when we judge that achievement of 2% inflation is in sight
  • We are not in a situation now to decide on the order of change in policy tools
  • One of the most important factors to judge prices is strength of wage growth

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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