MNI BOJ WATCH: Ueda Says Flexible YCC Not Move To Easy Policy

The Bank of Japan announced on Friday it would tolerate greater movement of the 10-year bond yield to as high as 1%, but Governor Kazuo Ueda said the change was aimed at making easy monetary settings more sustainable and brushed off any suggestion that this was a step towards policy normalisation.

“The BOJ is still some distance away from removing its negative short-term policy interest rate,” Ueda told reporters after the two-day meeting.“Sustainable and stable achievement of the price stability target of 2%, accompanied by wage increases, has not yet come in sight.”

While the BOJ will now tolerate moves in the 10-year yield above its recent upper limit of 0.5%, the long-term rate target remains at around zero percent. (See MNI POLICY: BOJ Mulls Softer 10-Yr Target, Flexible YCC Bands)

Ueda said he does not expect the yield to rise to 1%, despite the relaxation, which is nonetheless intended to allow the rate to respond to economic and price developments.

AVOIDING NEGATIVE SIDE EFFECTS OF YCC

“There are upside risks to prices. Looking ahead, if such a risk materialised, interest rates would rise,” he said, adding “Strictly capping long-term interest rates could affect the functioning of bond markets and prompt volatility in other financial markets.”

These other financial markets include foreign exchange markets, he said, though the BOJ does not target the yen.

The board’s median forecast for the fiscal 2025 core consumer price index was unrevised from April’s 1.6%, still below the 2% target, reflecting low confidence among policymakers of a strengthening virtuous cycle. Now the focus will shift to whether the October Outlook Report sees an revision of the fiscal 2025 inflation view. (See MNI POLICY: Chances Rising BOJ Ups 2025 Inflation View In Oct)

Ueda said the probability of a U.S. soft-landing has increased but warned that some of the impact of cumulative rate hikes on the U.S. economy, especially its financial sector, has yet to be felt.