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 did not extend the cap to 1.5% as speculated earlier but instead formalized the 1% cap. 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, move higher for yen crosses. The yen fell to fresh lows on the day with USDJPY up to 150.75 while EUR/JPY was a its highest since 2008 towards 160.80. The BOJ decided to make YCC more flexible saying Japan’s inflation outlook overshooting but due largely to prolonged rises in import costs.
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%
- Widens reference range to 1.0% point up and down each around its 10-year JGB yield target vs previous 0.5% point
- Flexibly increase JGB buying, fixed-rate operations and collateral fund-supply operations
- Changes language around 1.0% 10-year JGB yield cap
- Decides to keep yield target but make 1% a reference cap
- Will guide market operations nimbly
- Will regard upper bound of 1% for 10-year JGB yield as reference in its market ops
- Will determine offer rate for fixed-rate JGB buying ops each time, taking account market rates and other factors
- Decides to make YCC more flexible
- Japan’s inflation outlook overshooting but due largely to prolonged rises in import costs
- Wages, prices must strengthen in virtuous cycle
- BOJ will patiently continue monetary easing under YCC to support economic activity, create environment where wages rise more
- Appropriate to make YCC more flexible given very high uncertainty over economy, markets
- Strictly capping long-term rate with fixed-rate purchase operation at 1% will have strong positive effects but could also entail large side effects
- As such, BOJ decided to conduct YCC mainly through large-scale JGB buying and nimble market operations
- BOJ makes no change to its forward guidance
Inflation Forecasts Raised:
- 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:
- 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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