MNI BoJ Review - July 2023

Executive Summary

• On Friday, the BoJ announced its decision to maintain the short-term policy interest rate at 0.1% and allow the 10-year JGB target to fluctuate within around plus and minus 50bp from the target level of zero per cent. However, the market was taken by surprise as the BoJ made a notable change to its Yield Curve Control (YCC) framework, providing greater flexibility. Now, the 10-year yield will not be rigidly confined to the 50bp band and can exceed up to 1%.
• During the BoJ's post-meeting press conference, Governor Ueda refrained from hinting at future decisions, including policy bias, and emphasised that the move was not a step towards policy normalisation.
• Prior to the meeting, Governor Ueda had managed expectations by indicating that no policy changes were likely. This approach is not surprising, considering his previous stance that any adjustments to the YCC framework should come as a surprise. However, this strategy carries the risk of the markets questioning his future guidance on inflation and policy.
• In the quarterly Outlook Report, the BoJ significantly raised its inflation outlook (core CPI) for FY23 to 2.5%, up from 1.8% in the April report. Despite this, the central bank maintained its easing bias and emphasised its readiness to implement additional easing measures if needed.
• Full review here: BoJ Review - July 2023