MNI INTERVIEW: Ex-BOJ Maeda Sees YCC Adjustment in Q3

The Bank of Japan will adjust its yield curve control framework to make it more flexible as early as in the third quarter to head off the danger of a rise in interest rates as expectations build that that it will achieve its price target, a former BOJ executive director in charge of monetary policy told MNI.

“If confidence increases in financial markets that the 2% price target will be achieved, market players will increase bond selling, making it difficult for the Bank to maintain YCC,” said Eiji Maeda, who left the BOJ in 2020 and is now president of the Chiba-Bank Research Institute. “So the BOJ will make YCC flexible before the confidence of hitting the 2% price target strengthens.”

Maeda did not elaborate as to how the BOJ would adjust YCC, but said that while the Bank would tolerate some rises in yields as the economy improves it would want to avoid any sharp increase in long-term interest rates.

Private economists have floated the idea of doubling the ceiling of its yield range for the 10-year bond to 1%. While Maeda didn't rule out such a move, he said that raising the target of the long-term interest rate would be unlikely as the market would perceive it as a step towards tightening.

NO QUICK MOVE AWAY FROM YCC

The BOJ will not abandon its yield curve framework lightly, he said, as it believes that it is essential to achieving its inflation target.

For the moment, the Board still sees risks to prices skewed to the downside for fiscal 2025, Maeda said. “The focus is on whether and when the BOJ will judge the risks to prices to be balanced,” he said, adding that this could prompt adjustments to YCC as early as the autumn, assuming that the Bank remains confident that the U.S. will not fall into deep recession and that Japan’s economy will continue to recover, with prices moving higher and labour markets tight.

MNI has earlier reported that BOJ staff could recommend an increase to the 0% central rate currently targeted under YCC at the July meeting, though it is uncertain that Governor Kazuo Ueda would follow such advice (see: MNI POLICY: BOJ Officials Mull Recommending July YCC Tweak). MNI also understands that BOJ officials are paying close attention to the potential for a snap election, which Prime Minister Fumio Kishida could call at any time after he conveys an extraordinary Diet session. Any adjustment to monetary policy would be impossible during an election campaign.

BOARD REVISIONS

While the board will revise its median core inflation forecast up from April’s 1.8% to above 2% in July, it will not top the 3.0% marked in fiscal 2022, Maeda said.

“In theory, the upward revision of the median forecast this fiscal year will lead to an upward revision of the median forecast in fiscal 2024 and 2025,” he said. If, he added, the BOJ does not revise up the median forecast for fiscal 2024 and 2025, it would attribute this to weak international commodity prices.

Maeda, however, said that the impact of weak commodity prices will be offset by the impact of the yen’s fall from levels seen in April. The main focus will be on how the BOJ assesses the price-risk balance and the degree of downside risks, he said.

An upward revision of the inflation view for this fiscal year will contribute to raising wages next year, which in turn will increase inflation, he added. “Japan’s prices rose at first due to cost-push and wages rose on the back of an economic recovery,” he noted. “Japan is in a process of shifting to domestic factor-driven price and wage hikes from external shock-driven price rises.”

Maeda noted that Ueda’s communication style differed from that of former Governor Haruhiko Kuroda. Ueda has changed his price view incrementally, meaning he could easily explain any surprise policy action without market criticism, Maeda added.