MNI BOJ WATCH: Yield Curve Control On Hold, October In Focus

The Bank of Japan is likely to maintain its yield curve control policy unaltered when it meets on Sept 21-22 as the economy and prices move in line with forecasts, however its focus will shift to upcoming October service price revisions amid persistently high costs.

With officials already envisaging scrapping yield curve control next April should wage gains persist, possibly preceded by an increase in the overnight rate from negative levels, officials are waiting to see whether household inflation expectations ease together with core CPI. For the moment they expect private consumption to continue its moderate recovery path, despite the impact of persistent negative real wages, which has prompted supermarket stores and food service industries to cut some retail prices. (See MNI POLICY: April YCC Removal Window Possible On Wage Data)

The Board’s likely decision to hold steady this month will come after July’s adjustment to yield curve control in which it raised its effective limit on the 10-year yield to 1%, a move which was met with a relatively calm market response, though the 10-year rate rose to 0.720% on Sept. 12 – the highest since January 2014. (See MNI BOJ WATCH: Ueda Says Flexible YCC Not Move To Easy Policy)

OCTOBER OUTLOOK

A key factor in October’s outlook report, to be published after the Oct. 30-31 meeting, will be whether there is an increase in the number of policy makers expecting upside risks to the 1.8% core-core CPI forecast for fiscal 2025. In July’s report, five out of nine board members saw upside risks to prices in fiscal 2024, but only two saw such risks in fiscal 2025, with three noting downside risks and the remaining members seeing them as balanced.

Bank officials will also focus on revised capital investment plans and corporate price-setting behaviour in the September Tankan survey due Oct. 2.

Developments overseas remain a major risk to the 2% price target, though if the U.S. economy avoids significant recession it will support the BOJ’s baseline economic recovery scenario and reinforce a favourable environment for wage hikes next year.