MNI BOJ WATCH: Easing, Policy Forward Guidance Likely To Hold

The Bank of Japan will likely not tweak its easy policy settings at the April 27-28 meeting as the shape of the yield curve remains relatively favorable and the recent rise in Japanese government bond yields consistent with movements overseas, MNI understands.

The board will keep the forward guidance for its policy rates as elevated downside risk to the economy remains and wage hikes on a macro basis are still unknown, despite major firms already implementing hefty pay increases and smaller firms following (see MNI BRIEF: Wage Hikes At Smaller Firms Spreading - BOJ Report). Wording on Covid-19 will also likely remain, along with phrasing about the Bank's willingness to "take additional easing measures if necessary” within its statement.

Some board members, however, could propose the removal of language linked to Covid due to the Government recently downgrading the nation’s infectious disease scale to Class 5 from Class 2 – the same status as the seasonal flu – effective from May 8. But they will see the need to keep an easing bias amid the heightened downside risks to the economy.

The distorted yield curve adjusted somewhat following the decline in interest rates amid concern over financial markets caused by the collapse of U.S. regional banks, reducing an imminent necessity to tweak policy framework. Bank officials judged the sustainability of yield curve control has strengthened due to a combination of the drop in interest rates and the BOJ's modification of the Securities Lending Facility (SLF) that restricted inappropriate use by speculators (see: MNI BRIEF: BOJ's New Operation Targets JGB Short Sellers).

But officials remain vigilant against the risk of increasing upward pressure on interest rates caused by the market's lingering perception over policy tweaks. Bank officials think bond market conditions are different compared to December 2022, when the BOJ widened the 10-year range, MNI understands.

OVERSEAS IMPACTS

Policymakers will examine the outlook for the economy, prices and the impact of the global economic slowdown, with a focus on the U.S. economy and financial sector.

Policymakers are likely to maintain the view that Japan’s economic recovery will continue, despite challenges to exports and production. The BOJ should not rush to adjust policy prematurely, as early policy action could spoil its chance to achieve the price stability target, officials believe. The BOJ will continue to monitor the clouded outlook for the U.S. economy and global financial markets for sometime.

As for the update of the medium-term economic growth and inflation rate, the Board’s median forecast for the core consumer price index this fiscal year will be revised up from a gain of 1.6% made in January due to pass-through of cost increases and wage hikes. But the median forecast in fiscal 2024 will be little changed from January’s 1.8%, as upward pressure from pass-through will likely slow.

While the median CPI forecast for fiscal 2025 is expected to be slightly below 2%, the Bank is concerned whether this can be achieved in a stable and sustainable manner due to a lack of confidence over continued wage hikes.