MNI BOJ WATCH: Kuroda Dismisses Market Speculation On YCC Hike

Bank of Japan Governor Haruhiko Kuroda dismissed the chance of a near-term policy change, citing downside risks to economy and inability to achieve the 2% price target over the bank's projection period, but he left open the possibility of shifting the yield curve control policy to a shorter maturity.

“I don’t see the need to further widen the range of the 10-year interest rate” and the BOJ needs to maintain easy policy to support the economy, Kuroda told reporters after the BOJ maintained its monetary policy settings on Wednesday, including the 50bp band around its 10-year yield target. (See: MNI BRIEF: BOJ On Hold; Keeps Forward Guidance; Expands Ops)

However, he didn’t rule out the possibility the BOJ could change its yield curve control policy, such as shifting the long-term policy target to a short-term maturity. (See MNI POLICY: BOJ Eyes Maturities As Yield Pressure Builds)

"It is appropriate for the BOJ to keep short-term and the 10-year interest rate, which is the benchmark rate among long-term interest rates to form an appropriate yield curve. But (I) will not rule out (a possible change) completely," Kuroda said. The BOJ shocked markets in December when it widened the band around its 10-year yield target from 25bp to 50bp around zero percent.

Kuroda expects market speculation about near-term policy adjustments to be corrected as the BOJ made it clear that it will maintain easy policy amid no sign of the 2% inflation target being achieved and sustained. The BOJ's Outlook Report kept the core Consumer Price Index forecast steady at 1.6% for the 2023 fiscal year, while the fiscal 2024 forecast was raised to 1.8% from 1.6%. (See MNI BRIEF: BOJ Keeps FY23 CPI At 1.6%, Ups FY24 CPI To 1.8%)

“It is natural for market players to have various view on the outlook for monetary policy. The necessity is the BOJ discusses monetary policy openly and clarify them to markets,” Kuroda told reporters. “Core CPI rose above 3% but it is expected to fall below 2% in the middle of fiscal 2023,” Kuroda said.

He added that the underlying trend of prices, measured by the output gap, the expected inflation rate, and wages was likely to strengthen gradually.

But the achievement of the 2% price target in a stable and sustainable manner hasn’t came into sight and the BOJ needs to support the economy with easy policy to create an environment that enables firms to raise wages.

MARKET SPECULATION

Kuroda said there was no central bank that decided what policy would be before the policy decision meeting. But it is questionable whether his remarks will tame market expectations of a near-term tweak to the BOJ's easy policy.

Market players are becoming more keenly focused on the April policy setting meeting under the new governor. Policymakers will also unveil medium-term economic and inflation projection out to fiscal 2025 after wage hikes in mid-March.

The BOJ maintained its easing forward guidance for the policy rates, showing policymakers are vigilant against the near-term downside risks to the economy and saw the need to keep the easing bias.

The Japanese yen fell sharply against the U.S dollar following the announcement, falling from around 128.50 to 131.5 before retracing some losses to recently trade at 129.9. The yield on the 10-year JGB fell to 0.406% from a high of around 0.51% in morning trade. (See JPY : Yen Offered As European Activity Picks Up)