MNI INSIGHT: BOJ Mulls New Easy Policy Language Before Holiday

The Bank of Japan may consider adding a fresh reference to easy policy in the statement following its April 27-28 meeting in response to prolonged pandemic curbs, but will leave yield-control targets untouched despite fears that higher U.S. rates will continue to weaken the yen, MNI understands.

Consideration of the introduction of new language is in line with the BOJ’s custom of examining its policy options ahead of big events, in this case the Golden Week holidays from Apr. 28 to May 5 during which markets will be less liquid than usual. While it may decide not to do anything, the BOJ could justify a language change by pointing to the deterioration in economic and financial conditions caused by prolonged Covid-19 restrictions at home and abroad, including strict lockdowns in major Chinese cities.

Whatever their decision on the statement, bank officials in charge of daily operations will stick to their stance of preventing the 10-year bond yield from rising above 0.25% by unlimited purchases if necessary, despite the increasing difficulty of defending the yield cap and the risk that spreads with U.S. Treasuries will continue to widen, leading to a weaker yen.

So far officials note that Federal Reserve signals of further rate rises and a reduction in its balance sheet have been carefully communicated in order to limit volatility, though they are vigilant against the risk that Japanese government bond yields will rise and the yen depreciate during Golden Week.

BOJ INSISTS ON EASY POLICY

Recent comments from the BOJ have stressed the need to maintain policy settings intact and mostly downplayed the difficulty of defending yields near the top end of the range of minus/plus 0.25%. Their insistence on the current stance comes despite consumer complaints about rising prices fed by dearer energy and raw materials, with officials arguing that the spike in inflation will not lead to second-round effects or to achieving the 2% target in a sustainable way.

BOJ Governor Haruhiko Kuroda said on Tuesday that any rise in the 10-year yield above 0.25% would reduce the effects of easy policy and corporate appetite for capital investments.

But the Japanese government, which has already announced that it will take measures to cushion the impact of the rising prices on consumers ahead of an upper house election this summer, could put pressure on the BOJ to shift its stance.

A Cabinet Office survey showed on Friday that the share of respondents projecting consumer price gains rose to a record high of 92.8% in March from 91.7 % in February, while all four components of the consumer confidence index worsened from the previous month.

The diffusion index of household circumstances deteriorated to -36.9 in March from -34.2 in December.

With the BOJ intent on easy policy, the only defence for the yen may be jawboning, though Japan has not intervened to buy the currency since 1998. Kuroda suggested to lawmakers last week that recent moves by the currency, which briefly crossed JPY125 to the USD at the end of March, were “slightly rapid."