MNI INTERVIEW: BOJ Could Raise YCC Limit Again In 2023-Sekine

The Bank of Japan could raise the effective upper limit of its 10-year bond yield curve control range from 1% in September or in the fourth quarter if officials decide that the equilibrium rate has moved above that level or if real rates fall further, a former BOJ chief economist said.

But while the BOJ could make further adjustments to yield curve control after its decision in July to allow the 10-year yield to rise above what had been a firm 0.5% limit, it is likely to maintain its -0.1% rate for banks at negative levels, Toshitaka Sekine, who was chief economist at the BOJ until 2019 and is now a professor at the School of International and Public Policy at Hitotsubashi University, told MNI.

“It is unlikely that the BOJ will remove its negative interest rate policy in the fourth quarter as the bank has said that there is still some distance to sustainably and stably achieving the bank’s 2% inflation target,” Sekine said in an interview.

But, he added: “Additional tweaks to YCC cannot be ruled out, as the BOJ has left a door open to more adjustments.”

HIGHER YIELD RANGE

Sekine said that it has been appropriate for the BOJ to allow the 10-year rate to rise above 0.5%, given that the natural rate of interest rate is now close to 1%. At its July meeting, the BOJ maintained a 0% target for the 10-year yield, and said that while 0.5% remains the upper limit of its target range, it would tolerate a yield as high as 1% before it undertakes fixed-rate bond purchases.

“Looking ahead, if economic fundamentals, including price developments, continue to improve and if the trend inflation rate rises further, it will be natural for the upper limit of the 10-year interest rate to be raised to 1.5% or slightly higher,” Sekine said.

Such a view is supported by the BOJ board’s median forecast for core-core consumer price inflation of 1.8% in fiscal 2025, he said, though he stressed that the Bank would be very unlikely to allow rates to rise much above 1.5% as that would add too much to government’s debt funding costs.

In order to raise the 10-year limit, the BOJ could either put a floor of 1.5% on its fixed-rate bond purchases while still keeping 0.5% as a reference for the yield range, or simply increase the 10-year target from the current zero.

“Japan’s inflation rate may not fall as much as bank officials predicted. In fact, the number of board members who saw upside risks to prices has increased from April,” Sekine said. “Although they still see large downside risks.”

WAGE GROWTH KEY

The pace of wage growth in the next fiscal year will remain the main focus for policymakers as they decide on whether to completely drop yield curve control, he said, adding that this information will only be clearer by January or later.

In the meantime, the BOJ insists that it is continuing with easy policy within the yield curve control framework and that it will not raise the negative interest rate until it is close to achieving its 2% inflation target in a stable and sustainable manner, Sekine noted, pointing to comments from Deputy Governor Shinichi Uchida. (See MNI BOJ WATCH: Ueda Says Flexible YCC Not Move To Easy Policy_

The BOJ’s board is unlikely to upwardly revise its median forecast for core-core CPI in fiscal 2024 and 2025 when it updates its projections in October, he said, noting that increasing its 2025 median projection of 1.8% would imply that it should it increase its short-term policy rate to around 2% under the Taylor Rule.

“Despite its strong [FY2025] projection, if the BOJ continues to say that the Bank isn’t confident of hitting 2% target, what are they thinking about? And what is their policy reaction function? Oh my God, I cannot understand,” Sekine said, adding that the fourth-quarter performance of the U.S. and Chinese economies in the fourth quarter will also be crucial for BOJ’s decisions.