MNI INTERVIEW: BOJ To Scrap Yield Curve Control In April-Momma

The Bank of Japan is likely to scrap its yield curve control and negative interest rate policies at its April meeting, perhaps in conjunction with a government declaration of victory over deflation, a former BOJ chief economist told MNI.

The BOJ will have been able to form a view on the outlook for wage hikes by March, and would be able to explain its strategy for achieving its 2% inflation target over the medium term in its April Outlook Report, which will include projections until fiscal 2026, Kazuo Momma said.

While the Bank has stressed that it is still not sure whether wage data will convince it that its inflation is sustainably in sight, its move away from ultra-easy policy could be assisted by a government declaration of victory over Japan’s deflation by March or April, Momma said.

The BOJ and the government pledged to work together to overcome deflation in a joint statement in January 2013 in which the central bank’s inflation target was increased to 2% from 1%.

“It would be difficult to see how the BOJ’s achievement of its 2% target could be separated from a government declaration of having overcome deflation,” said Momma, who was also BOJ executive director in charge of monetary policy and later assistant governor until 2016 before joining Mizuho Research and Technologies as executive economist.

OUTPUT GAP

Some observers, like another former BOJ chief economist, Seisaku Kameda, think the BOJ could move to tighten policy more quickly. (See MNI INTERVIEW: BOJ Yield Curve Move Possible In January-Kameda)

But Momma noted that the Cabinet Office’s estimate of the output gap, one of the four data points on which the government judges progress against deflation, could turn negative again in the third quarter, from +0.1% in Q2, so it may have to await Q4 data to be certain of a positive gap for the year as a whole.

The first preliminary Q4 GDP estimate will be released on Feb 15 and the second preliminary figure on March 11. The other three data points followed by the government are the GDP deflator, unit labour costs and consumer price inflation data itself.

“Judging from those factors, the BOJ will not be able to declare a victory in achieving the 2% target this year, or at the beginning of next year. This is my baseline view,” Momma said.

One possibility for the BOJ would be to change its policy rate from the overnight deposit rate, currently at -0.1%, to the traditional unsecured overnight call loan policy rate, Momma noted.

“I don’t know whether the BOJ will shift its policy interest rate to the [unsecured] overnight call loan rate immediately after removing YCC, that will depend on economic and price conditions at that time, and a tweak to YCC is possible," Momma said. "But the bank will not immediately start quantitative tightening to shrink its balance sheet even though the bank drops YCC.”

PREVENTING LONG-TERM YIELD SPIKE

The BOJ will continue to reinvest maturing government bonds, and will buy JGBs in a flexible manner to avoid any sharp rises in long-term rates, he said.

Under yield curve control, the BOJ caps 10-year yields at 1%, though they currently trade at about 0.8%, and touched the highest level since August 2013 at 0.805% on Thursday.

“The question is how much will the BOJ tolerate long-term interest rates to rise and how will it respond when the rate rises close to 1% due to the upward pressure on U.S. interest rates,” Momma said. “If the long-term interest rate rises too much it would weigh on the economy and eventually prevent the Bank from achieving the 2% target.”

A rising 10-year yield amid a global bond sell-off, and its implications for an already weak yen, will be a topic for the BOJ at its October meeting, Momma said.

The BOJ’s board is unlikely to increase its median forecast for inflation in fiscal 2024 and 2025 in October, amid high uncertainty, he said, noting that while September’s Tankan survey indicated businesses’ inflation expectations have risen this year, the mid- to long-term inflation expectations had not.