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

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    The BoJ Governor Ueda said that a “big shift” in the inflation view could merit a tighter stance which sets a high bar for the coming forecast changes at the July meeting to matter. He also made it clear that they don’t feel compelled to set up any such moves in advance in Favour of saying “It’s inevitable that sometimes there’s a certain element of surprise.”

    The moves were widely expected, but there was clearly a tail in the market that was positioned for less dovishness. The yen weakened by about ½% to the USD and rose toward 141. The 10-year yield slipped just beneath 40bps. The Nikkei rallied by about 0.7%.

    On the dovish side, the standard narrative is that Japan has seen many false starts to inflation since its property and market bubbles burst 3+ decades ago and been burned by premature actions from the BoJ in the past.

    Japanese inflation is also buoyed by some transitory drivers such as the ongoing lagging effects of last year’s yen weakness and higher oil prices. Japanese real wages also remain weak at least according to the hard data to date, and so this missing link is waiting for clearer evidence. Add to this uncertainty over the external environment.


    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.

    Helmholtz Watson

    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 unani
    [See the full post at: Bank of Japan No Change to Monetary Policy, JGB Yield Band Hard Celling to 1.00%]

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