MNI BOJ WATCH: On Hold As Kuroda Era Ends; Ueda To Go Slowly

Bank of Japan officials will not risk any policy changes to address ongoing bond market distortions at the last meeting under Governor Haruhiko Kuroda, though they are vigilant against the threat of bond market volatility amid the change of leadership in April, MNI understands.

Haruhiko, whose decade-long tenure comes to an end on April 8, is not expected to unveil new tweaks to yield curve control on Friday to avoid being seen as pre-empting any policy shifts under Governor-elect Kazuo Ueda. Officials say more time is needed to assess December's widening of the band around the 10-year yield target and the impact of daily open market operations.

Bank officials are concerned about the possible fall-out from policy changes such as a further widening of the 10-year yield band. They worry that widening the 10-year band to 75 basis points from 50 basis point could prompt market participants to immediately factor in the next widening, which would increase upward pressure on bond yields.

Ueda, who is set to take the helm on April 9, is not expected to take policy action at the April 27-28 meeting as he will want to avoid being viewed as rushing to normalise monetary policy. He is expected to take a cautious and gradual stance, attentive to the risk of undermining the foundation of a sustainable economic recovery.

The 71-year old critic of yield curve control has previously warned against premature rate hikes. The BOJ views YCC modifications as vastly different from abolishing negative short term rates, the symbol of Japan's easy policies. Removing the negative interest rate would be interpreted as a reversal of easy policy, possibly accelerating increases in bond yields. (See MNI POLICY: Ueda's YCC Concerns Hint At BOJ Policy Shift)

MARKET COMMUNICATION

Bank officials strongly hope Ueda will restore smooth communications with market participants left wary after Kuroda shocked the market with December's surprise widening of the 10-year yield band.

The scale of BOJ government bond purchases fell in February compared with January, indicating the BOJ has not been as pressured to cap the 10-year yield as it was after widening the band from 25bp to 50bp. It is uncertain how board members will assess the fall in required purchases, officials said.

The incoming governor will be aware of the potential damage to his credibility should his policy decisions cause an economic downturn. He is expected to sharply focus on the outlook for Japan’s economy and prices, as well as the outlook for global growth given the risk of more rate hikes and a U.S. recession.

Domestic wage developments are also viewed as being key early in his governorship. Data on the pace of wage hikes will not be available in April, meaning Ueda will have to carefully examine how they evolve at least for a quarter after he takes office.