MNI INTERVIEW: BOJ Yield Curve Move Possible In January-Kameda

The Bank of Japan should be able to determine the pace of next year’s wage hikes by as early as January and could move to adjust its easy policy stance that same month, probably by loosening its yield curve control framework or dropping it altogether, former BOJ Chief Economist Seisaku Kameda told MNI.

While the BOJ could choose to wait until March when it will have results from the closely-watched wages survey by Trade Union Confederation Rengo, it should be able to form a view earlier by examining corporate profits and information from sources including business leaders, Kameda, now Executive Economist at Sompo Institute Plus, the insurance giant’s research arm, said in an interview.

In the event the wages data indicates the 2% inflation target can be achieved in a sustainable manner, the BOJ is likely to modify or eliminate yield curve control, though it would avoid raising its overnight lending rate at the same time because of the danger of prompting sharp rises in long-term rates, he said.

YIELD CURVE CONTROL FIRST MOVE

MNI understands among options considered by the BOJ would be raising the overnight rate from negative levels, while possibly swapping YCC for a quantitative bond purchase target to limit market fallout. (See MNI POLICY: BOJ Mulls Quantity Target For Bonds As Soon As Jan)

But Kameda said the BOJ would be more likely to leave the rate unchanged at first. Instead it could opt to make a further adjustment to YCC, which it modified earlier in the year, when it raised the upper limit of its target band for the 10-year yield to 1% from 0.5%, in a move which allowed it to reduce bond purchases that had reached levels it considered to cause market distortions.

“The BOJ in July strengthened the flexibility and the sustainability of YCC," said Kameda, who left the BOJ in 2022. "Now, for example, the bank could raise its long-term yield target, currently around zero percent, to 0.25%.” If the 10-year JGB yield approaches the current 1% cap, the BOJ could raise the target of the cap to 1.25%, and then continue to increase it gradually to build tolerance to higher rates, he said.

“Raising the long-term interest rate target and its cap under the current policy framework will be one option,” he said. “The BOJ doesn’t want to raise long-term interest rates sharply, so the Bank will not remove the negative interest rate policy immediately as such a move will be interpreted to mean that the BOJ is abandoning its easy policy.”

NEGATIVE RATES A SYMBOL

The negative overnight interest rate is a symbol of the BOJ’s ultra-easy policy, so any move to drop it simultaneously with YCC would have a huge effect on financial markets, Kameda warned. In the meantime, October’s Outlook Report is unlikely to see significant changes to the BOJ’s median forecasts made in July for core CPI at 1.6% and core-core CPI at 1.8%, he said.

“There are favorable factors, such as high corporate profits and strong capital investment plans, but they will not change the BOJ’s view on prices and wages sharply,” Kameda said. Even if the median forecasts are revised slightly upwards, the Bank’s price assessment is set to stay unchanged until it has more data about next year’s wages, he said.

But solid output prices and inflation expectations reported by businesses in the September Tankan are supportive of the BOJ’s view that prices will be anchored, Kameda noted.

“The impact of cost push seemed to have peaked out but corporate price views remain solid," he said. "The Tankan results showed that businesses haven’t changed their view that price rises and wage hikes will continue."

The BOJ’s focus will be on whether inflation expectations for three and five years ahead stay at about 2%, though expectations will be revised down from the current high levels caused by the past rise in import prices.