Increased YCC Flexibility, Inflation Risks Skewed To Upside In FY23 & FY24

The Bank of Japan left long and short term rates at 0% and -0.1%, as was widely expected. YCC remained at ±0.5 around the 10-year but it is not rigid and just a reference which will now be managed “flexibly” so that the BoJ can react more “nimbly” to upside/downside risks. But that flexibility only reaches to yields at 1%, up from 0.5%. There was one dissenter Nakamura, who wanted more YCC flexibility.

• FY23 core inflation was revised up to 2.5% from 1.8% as expected and core-core to 3.2% from 2.5%. FY 2024 was revised down only slightly to 1.9% from 2% with core-core unchanged at 1.7%, which were probably higher than analysts thought they would be. FY25 was unchanged at 1.6% and 1.8% respectively.
• The BoJ sees upside risks around both FY23 and FY24 inflation, which is slightly more hawkish than the last meeting, which only saw the risks around FY23. Inflation expectations are also expected to rise again and wages should pressure inflation so that reaching the 2% target is not yet in sight. But forecasts signal that the BoJ still expects it to be reached in FY24.
• The BoJ still expects the recovery to continue “moderately” and that growth should exceed potential. FY23 was revised down 0.1pp to 1.3% but FY24 and FY25 were left at 1.2% and 1.0% respectively.