The Bank of Japan took a key step toward dismantling its easy monetary policy by making its yield curve control more flexible.
Among the changes:
- The Bank of Japan will let 10-year Japanese bond yields TMBMKJP-10Y, 0.550% reach as high as 1%, from the previous threshold of 0.5%.
- The central bank lifted its inflation forecast for fiscal 2023 to 2.5%, an increase of 0.7%.
- Bank of Japan Gov. Kazuo Ueda maintained that the central bank still has an easy monetary policy stance.
Here’s how analysts are reacting:
“The BoJ has positioned this policy adjustment as aimed at enhancing the sustainability of its current accommodative policies, so we see little potential for the emergence of expectations for further monetary tightening. With Japan’s monetary environment likely to be kept relatively loose, we see little risk of the current yen appreciation/share price decline becoming a sustained trend,” said Ryota Sakagami, equity strategist at Citi.
Krupa Patel, head of international market intelligence at J.P. Morgan, compared the BoJ shift to its de facto exit from exchange traded fund purchases. In July 2018, the central bank said it may “increase of decrease the amount of purchases depending on market conditions,” but since then, excluding the pandemic period, it bought very little. “We think the BoJ likely will gradually reduce its JGB purchases while allowing 10Y yields to move higher over time,” said Patel.
Kit Juckes, chief currency strategist at Societe Generale, noted the Bank of Japan didn’t raise its 2024 or 2025 inflation forecasts, which he says reflects its lack of confidence that deflation is any way defeated. But he said the central bank realizes its yield curve control is dangerous.
“By anchoring JGB yields at a time when other major central banks have been raising rates, it has been a major factor in the yen reaching its lowest level, in real terms, since the 1970s. So, the BOJ wants to very carefully dismantle YCC, and the yen will rally as slowly as they do so. For the moment, that means there is little upside to USD/JPY, but the fall from here is also likely to be very slow, until the global trend in bond yields turns decisively lower,” said Juckes.
The dollar USDJPY, +0.16% was changing at hands at 139.32 yen, having climbed 6% vs. its Japanese counterpart this year.
That the Nikkei 225 NIK, -0.40% saw a modest 0.4% decline is evidence “of how strong the ongoing Japanese bull market is and how investors likely view any sign of BoJ policy normalization happening against the backdrop of an economy moving from its decades long disinflationary phase to a more normal inflationary cycle as ultimately a positive,” said JPMorgan’s Patel.