MNI INSIGHT: Coordinating BOJ, Govt Policy Aims Under Review

Tweaks to monetary policy that could include a focus on the five-year government bond tenor, but not change easy policy, are under discussion to keep the Bank of Japan in step with the government's efforts to ease the impact of high energy prices, MNI understands.

BOJ officials see shortening the 10-year Japanese Government Bond (JGB) policy interest rate to the five-year zone may be a better tool than widening the 10-year interest rate range, see: MNI INSIGHT: BOJ Policy Could Pivot With Changing Price Views.

Still, some BOJ officials said such a move would be classed as a tightening policy and are concerned over how to communicate with the markets.

NO UNINTENDED EFFECTS

Both current and past BOJ officials said any policy action cannot have the unintended effect of making the market think it is meant to signal the unwinding of easy policy.

At the same time, the prospect of headline consumer prices reaching near 2% in or after April however has drawn concern from the government ahead of an upper house elections this summer with steps already taken including subsidies for petrol and other support measures for households and companies.

YEN AND JGBs

Amid signs of a slower economy and a weaker yen, more coordination is likely to achieve a sustainable economic recovery, officials surmise, and avoid a sharp downturn from the pandemic and geopolitical headwinds from the war in Ukraine. Spot yen hit a high of 122.97 on Monday against the USD, up from 122.05 at Friday's close.

The BOJ also stepped into the JGB market on Monday with an offer to buy unlimited bonds as the 10-year yield neared 0.25%, close to an upper limit from -0.25%/+0.25% that the BOJ tolerates under its yield curve control policy.

Soaring crude oil prices are a major concern for the government and BOJ because of the cost-push implications for inflation, instead of the desired demand-pull from higher wages and more retail spending, that could be highlighted in the BOJ's quarterly Tankan survey due on 1 April.

ANALYSIS

In March 2021, the BOJ analysed that the effects of a decline in interest rates on economic activity and prices are relatively large for short- and medium-term interest rates.

The BOJ has committed to continuing to expand the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2% and stay above the target in a sustained manner, including overshooting the target.

But if the BOJ is worried about the second-round effects of higher prices, it will have to adjust monetary policy to cope.

There has however been some focus that higher cost-push inflation could prompt companies to raise wages amid signs that a deflationary mindset and cautious price-setting activity are ebbing, indicating Japan is getting out of its price rigidity.