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MNI BOJ WATCH: YCC Tweak In Focus, But Downside Risks Persist

(MNI) Tokyo

The Bank of Japan’s meeting ending on Friday is likely to see discussion on allowing more movement around its 0% 10-year-yield target or widening its 100-basis-point trading band, but there is no consensus for such a move among the BOJ Board’s nine members, MNI understands.

While officials do not think yield curve control is causing the bond market distortions seen previously, a rise in inflation and falling real interest rates could argue for a move.

Analysis presented by bank staff will be key to the decision at the two-day meeting. While the Board is likely to revise its 2023 inflation view to its 2% target or higher from April’s 1.8%, this would put downward pressure on the 2024 forecast due to base effects. Doubts hang over the outlook for inflation in both 2024 and 2025.

The chances are rising that it will also revise up its 2025 inflation view at its October meeting, but the Bank is also increasingly concerned about downside risks such as from a U.S. economic downturn. (See MNI POLICY: BOJ Mulls Softer 10-Yr Target, Flexible YCC Bands)

VIRTUOUS CYCLE

Recent consumer price rises have been stronger than expected, with annual core inflation at 3.3% in June as companies pass on higher import costs and announcements by big firms of wage rises for next year have encouraged bank officials, but they are still unsure that a virtuous cycle of wage, and price rises will push medium-to-long-term inflation expectations to target.

Governor Kazuo Ueda will pledge to continue with easy policy at this meeting even if yield curve control is adjusted, but while his recent comments have dampened speculation of any swift move away from yield curve control he has noted that the Bank will scrutinise economic and price developments meeting by meeting. An increase in the 2025 inflation outlook after the BOJ’s October meeting would be likely to prompt speculation of a shift away from the policy in the subsequent months, as MNI has reported. (MNI POLICY: Chances Rising BOJ Ups 2025 Inflation View In Oct)

MNI Tokyo Bureau | +81 90-2175-0040 | hiroshi.inoue@marketnews.com
MNI Tokyo Bureau | +81 90-2175-0040 | hiroshi.inoue@marketnews.com

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