The Bank of Japan as widely expected kept unchanged its -0.1% target for short-term interest rates, and 0% for the 10-year government bond yield unanimously. 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%. There was much anticipation in the market prior as to Governor Ueda’s influence at the BoJ. BoJ inaction drives relief through global carry trades. The vote was 8-1 on YCC. Board member Nakamura dissented to decision on YCC, considering it was desirable to allow greater flexibility after confirming rise in firms’ earnings power from sources such as financial statements statistics.
JGB yields rallied in bull flattener fashion 10-year JGB yields jump to its highest levels since 2014. Yields to 0.57%. The 0.50% mark is no longer the hard cap for any upside in yields. The board that 0.50% allowance from zero is no longer a “rigid limit” but more of a “reference”, with the hard line being drawn at the 1.00% mark.
The yen weakened, move higher for yen crosses,
BOJ July 2023 Monetary Policy Decision Statement
BOJ Monetary Policy Highlights
- Bank of Japan short-term interest target kept at -0.1%
- 10-year JGB yield target remains around 0%
- The BOJ yield curve control program unchanged to allow for 10-year bond yields to target a band in and around 0.50%.
- Yield curve control (a unanimous vote)
- BOJ last meeting made an amendment to the principal terms and conditions of the Complementary Deposit Facility – adds that there is no change in the framework of the Complementary Deposit Facility and the interest scheme to promote lending.
- Will guide yield curve control more flexibly
- Appropriate to heighten sustainability of monetary easing
- Will operate yield curve control more flexibly to respond nimbly to upside, downside risks
- Will keep offering fixed-rate operations for 10-year jgb yield at 1.0%
- In order to encourage formation of yield curve that is consistent guideline, BOJ will continue with large-scale jgb buying and make nimble responses for each maturity
There was one dissenter. BOJ makes decision on YCC by 8-1 vote:
- Board member Nakamura dissents to decision on YCC, considering it was desirable to allow greater flexibility after confirming rise in firms’ earnings power from sources such as financial statements statistics
- Nakamura dissents to decision on YCC but in favour of idea of conducting YCC with greater flexibility
- Nakamura in favour of getting on with a move towards more flexibility for yields.
- It appears he was arguing for a firm move to +/- 1%, not the ‘grey’ ‘maybe 1%’
More from the Statement:
- For example, by increasing amount of JGB buying and conducting fixed-rate purchase ops and funds-supplying ops against pooled collateral
- There are extremely high uncertainties for Japan’s economy, prices
- Must pay attention to financial, fx markets and their impact on Japan’s economy, prices
- Japan’s consumer inflation higher than projected in April outlook report
- Wage growth has risen, signs of change have been seen in firms’ wage, price-setting behaviour
- Inflation expectations have shown some upward movements again
- If upward movement in prices continue, effects of monetary easing will strengthen through decline in real interest rates
- Strictly capping long-term yields could affect bond market functioning, volatility in other markets
- Such effects are expected to be mitigated by conducting yield curve control with greater flexibility
- If downside risks to economy materialise, effects of monetary easing will be maintained through decline in long-term yields under yield curve control framework
Bank of Japan Governor Ueda press conference at 0630 GMT (0230 US Eastern time)
BOJ On Japan’s Economy:
Raised their inflation forecasts for this year, but not the next:
- Core-core CPI fiscal 2023 median forecast at +3.2% vs +2.5% in April
- Core-core CPI fiscal 2024 median forecast at +1.7% vs +1.7% in April
- Core-core CPI fiscal 2025 median forecast at +1.8 % vs +1.8% in April
BOJ quarterly report:
- Risk to inflation skewed to upside for fiscal 2023, 2024
- Japan’s economy is recovering moderately
- Inflation expectations showing signs of heightening again
- Japan’s economy likely to continue recovering moderately
- Japan’s economy to continue expanding above potential
- Japan’s consumer inflation likely to slow pace of increase, then re-accelerate as inflation expectations, wages rise
Inflation is running at nearly double the BoJ’s 2% inflation target. Tokyo core CPI (ex-fresh food and energy) accelerated to 0.6% m/m SA in April for the hottest reading since January 2021.
With the fairly stable composite PMI that may signal GDP strength in Q2, the effects drove yen appreciation dampening high prices of imported raw commodities and persistent yen weakness.
Inflation-adjusted labour earnings had continued to decelerate with the April reading down 3% y/y, but the effects of the annual Spring wage negotiations registered the biggest pay gains in 30 years at about 3.7% y/y. It can take several months for these gains to filter through official lagging data and so we might not have an accurate handle on nominal and real wage changes for a while yet.
Conduct of yield curve control
While significantly increasing the amount of JGB purchases, the Bank 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
From The Traders Community News Desk