MNI BOJ WATCH: Kuroda Dismisses Shock Shift As Tighter Policy

Bank of Japan Governor Haruhiko Kuroda dismissed suggestions that Tuesday's shock move to raise the band on the 10-year bond yield target to 50bp was either monetary tightening or a precursor to an exit from easy policy, amid gathering talk the central bank will adjust its framework under a new governor in 2023.

The decision to maintain its yield curve control policy but lift the upper limit of the band on the 10-year yield to 50bp from 25bp was defended as a move to restore functioning in the Japanese government market, assist the formation of the yield curve, and to enhance the transmission of monetary policy. The BOJ subsequently raised the rate on its fixed-rate bond buying operation to 0.50% from 0.25%. The shift sparked a sharp sell-off in Japanese bonds and a rally in the yen. (See JGBS : BOJ Stirs Memories Of 1989)

“Today’s decisions are aimed at restoring the functioning of financial markets, and doesn’t mean tightening and an exit,” Kuroda told reporters. He said there were no plans to tighten credit and he had no plans to review a joint statement between the government and the BOJ that stipulates the 2% inflation target should be achieved at the "earliest date possible".

There has been growing debate about changes to the decade-long framework of easy policy established under Kuroda's governorship, as the clock ticks down to the appointment of a new governor in April and as inflation rises at its fastest pace in 40 years. Tuesday's move gifted the next governor a modicum of additional policy flexibility. MNI recently reported that a change in policy may be drawing closer given rising inflation. (See MNI POLICY: BOJ Eyes 2023 CPI As Trigger For Policy Tweaks)

The shift is a tacit acknowledgment of the limits to the BOJ's 10-year yield range of 25bp amid upward pressure on JGB yields from high global inflation and rising overseas bond yields. Kuroda didn't rule out the possibility that market participants would anticipate further widening of the 10-year range, but that would depend on the inflation outlook and financial market conditions, he said, adding that sustainable rises in interest rates were unlikely.

However, the decision appears inconsistent with BOJ analysis from March 2021 that showed capital investment was unchanged by monetary easing "except when the range of fluctuations in the 10-year JGB yield over the preceding six months exceeds 50 basis points.” Kuroda and his colleagues had previously said that a widening of the 10-year range would mean a hike in rates. Tuesday's policy change was approved unanimously.

INFLATION MISS

Kuroda maintained the view that Japan’s core CPI will likely fall below 2% in fiscal 2023, although there may be an update on how the BOJ board views inflation in January's Outlook Report.

“The decisions don’t show that the bank intends to tighten policy or raise interest rates at all,” Kuroda said. “A 2% price target isn't in sight and it is premature to discuss reviewing the policy framework and an exit strategy from easy policy.”

Kuroda said a fall in core CPI below 2% in fiscal 2023 means a review of the policy framework is currently unthinkable.