MNI INTERVIEW: BOJ Won't Move On YCC Before July - Sakurai

The fall in bond yields and more stable yen affords incoming Bank of Japan governor Kazuo Ueda time to consider modifications to yield curve control, but no change is likely before July as policymakers monitor domestic and global growth and the outcome of wage negotiations, a former BOJ board member told MNI.

“The new governor Ueda well knows that he will lose everything if quick action spoils the economy and prices. So he will slowly go ahead with policy tweaks after properly ascertaining the outlook for the economy and prices, including the outlook for a virtuous cycle between wages and prices," Makoto Sakurai said in an interview.

“The most important issue is how Japan’s economy and wages develop in the coming months and their outlook," he said, underscoring the influential role wage negotiations will have in shaping the BOJ's thinking on whether the 2% inflation target can be achieved in a stable and sustainable manner. (See MNI INTERVIEW2: BOJ To Close In On 2% Target In FY25 - Kameda)

The fall in the 10-year bond yield from the upper limit of the 50bp band imposed by the BOJ gives Ueda breathing room to consider how to modify yield curve control. Ueda starts on April 9.

“The BOJ has a free hand now given no upward pressure on Japanese government bond yields and no considerably weak yen. The BOJ doesn’t need to rush to tweak policy,” Sakurai said.

He said the BOJ would likely keep yield curve control but consider changes to the long-term policy interest rate target. Former policymakers and economists have suggested the BOJ could widen the 50bp range around the zero percent 10-year yield target or shorten the targeted maturity.

The BOJ will move towards policy normalisation slowly amid elevated uncertainty about the global economy and financial system, he said. “If the outlook for Japan’s economy, including overseas economies, is OK after carefully monitoring their moves until around July, the BOJ can take its first step towards a policy tweak or normalisation.”

Sakurai warned the BOJ must consider the impact of any policy change, such as unrealised bond losses at banks and the stability of the financial system. (See MNI POLICY: BOJ Sees Stable Financial System, Wary Of Risks)

INFLATION, WAGES

Price rises appeared to have peaked out, although government subsidies to lower utility charges made it difficult to gauge the real pace of inflation, Sakurai said.

“Passing on higher costs in prices is stronger- and wider-than-expected. Core CPI will likely stay above 2% this year and the drop below 2% may be delayed next year,” he said.

He added that strong wage hikes will enable businesses to raise retail prices. Major Japanese firms are set to introduce hefty wage hikes from April as spring wage negotiation take place amid rising inflation and labor shortages. An interim survey by the Japan Chamber of Commerce and Industry showed 58.2% of smaller firms plan to raise pay in fiscal 2023 beginning on April 1.

“Non-manufacturers, especially eating and drinking services, and hotel services, are suffering from labor shortage, and wages in those industries may be raised considerably,” Sakurai said.

Sakurai said data about the extent of wage hikes across the broader economy, including smaller firms, which employ 70% of all private-sector wage earners in Japan, will not be available until August. The data will be key in determining whether the BOJ's hoped for virtuous cycle of wage-price rises is gaining traction.

The BOJ will also need to consider whether the upward pressure on wages can feed into next year's negotiations. “The wage hikes this year were triggered by cost-push inflation. One focus is whether the cost-push inflation continues and whether wage hikes will be also boosted by demand-side, not only cost-push factor. The BOJ needs to be sure,” Sakurai said.