Reply To: Bank of Japan No Change to Monetary Policy, JGB Yield Band Hard Celling to 1.00%


BoJ research (example here) has estimated that a one standard deviation movement in the yen (roughly 4%) adds 0.1–0.2% to inflation over 2–8 quarters before subsiding. Over the March 2022 to October 2022 period, the yen depreciated by about 30% to the dollar. If the effects are linear then this would translate into between a ¾% to 1½% lift to headline inflation with the effects gradually working through the system in 2023 into 2024.

The effects may not be linear (ie: each standard deviation move in the yen could carry different, possibly greater, effects upon inflation than the prior standard deviation move). The effects may also depend upon what was expected, the duration of the adjustment, and whether it’s fair to take the adjustment over that six-month period in isolation of moves before and after.

BoJ research also says that a one standard deviation in oil prices of roughly 15% would add 0.1–0.3% to inflation inside of a year before subsiding. Over roughly the first half of 2022, WTI oil jumped by about 70% in USD terms (we can’t double count the yen effects). Ergo, that could imply that inflation would be expected to rise by between ½% and 1½% due to oil prices and that this effect should be peaking about now, given that the oil surge has since abated.

To assess serial shocks to the drivers of inflation means, in part, looking at the evidence of what is happening to broad financial conditions. One reason for acting now could be to counter an easing of monetary policy conditions based upon the following evidence:

Some point to the fact that the real policy rate has turned more negative as inflation has risen.

Some point to the fact that the real policy rate has turned more negative as inflation has risen.
I think you could make the same point about the fact that the nominal 10-year JGB yield has dropped to under 40bps and hence is no longer testing the upper end of the +50bps band as it was until trouble hit global banking markets in March. So, they could counter such shorter- and longer-term real rate developments.
Ditto for the currency that has been depreciating throughout this year from about 128 to the dollar toward about 141 now. This risks a new round of serial upward lagging pressures upon inflation. The more such shocks you get, the more you risk seeing expectations rise.
and the same applies to stocks. The Nikkei has sharply rallied by 25% since about mid-March. Yes, 25%. Ueda had a comment overnight that pinned this on growth expectations. Growth? Where?? Perhaps it’s a Ueda put.