MNI INTERVIEW: Ex-BOJ Sakurai Expects Q4 YCC Adjustment

The Bank of Japan will likely adjust yield curve control in Q4 when the outlook for the U.S. economy and the potential for a virtuous wage-price cycle becomes clearer, a former board member told MNI.

“The median forecast for economic growth and inflation projection this fiscal year will be revised up at the July meeting, but the possibility of policy adjustment then is not high as the Bank cannot obtain sufficient data to ascertain the 2% price target,” said Makoto Sakurai in an interview.

In March, Sakurai told MNI the BOJ would not make changes to YCC before the July meeting (see: MNI INTERVIEW: BOJ Won't Move On YCC Before July - Sakurai). Following the Bank’s June meeting, Governor Kazuo Ueda reiterated his position that any premature move away from easy monetary policy came with risk (see: MNI BOJ WATCH: Ueda Stresses Dangers Of Premature Tightening).

WIDENED TARGETS

Sakurai expects the BOJ to widen the long-term policy interest rate target to a 75bp band from its current 50bp range.

He added the Bank will likely revise the median inflation forecast this fiscal year to about 2% from the 1.8% made in April, but the key focus will rest on how the BOJ revises the median forecast in fiscal 2024 and 2025. “Governor Ueda said that he is not confident about price rises in fiscal 2024 [after slowing from the recent high levels],” Sakurai said. “The sustainability of price and wage hikes will provide a clue.”

Cost-push initially triggered price rises, but demand-pull price hikes have occurred in some industries, especially services, following solid private consumption, he added. “Corporate price-setting and the thinking of wages are changing, indicating a price-wage virtuous cycle is set to work,” Sakurai noted. “The output gap is expected to turn positive in Q3, but Governor Ueda must seek more evidence before considering policy adjustment.”

The BOJ will focus on the global economy, Japan’s economic recovery and the nation’s financial system before adjusting YCC and normalising easy policy, he added. “If the U.S. economy falls into serious recession, it would spoil Japan’s economic and price-favourable mechanisms,” Sakurai warned. High uncertainty over the U.S. economy and the degree of any economic slowdown persists, and the U.S. Federal Reserve continues to face a dilemma over stubborn inflation and financial anxiety, he said.

He expects the BOJ to simplify its forward guidance, but will likely advance policy normalisation gradually, as it must pay close attention to the impact on the financial system through unrealised bond losses that rate hikes could cause (see MNI POLICY: BOJ Sees Stable Financial System, Wary Of Risks). He added the BOJ must also consider the impact of high rates on government funding costs. The government wants the BOJ to increase the flexibility of monetary policy but does not want interest rates to rise rapidly, Sakurai noted.

The BOJ's next policy-setting meeting is scheduled for July 27-28.