MNI INTERVIEW: July YCC Adjustment Unlikely - Ex-BOJ Econ.

The Bank of Japan is unlikely to adjust yield curve control at its next meeting in July, its former chief economist Seisaku Kameda told MNI, adding that he had been surprised at the BOJ’s determination under its new governor to make absolutely sure it achieves 2% inflation.

“The BOJ seems to be more cautious about adjusting YCC than I expected a few months ago,” said Kameda, who left the Bank in 2022 and is now executive economist at Sompo Institute Plus. He added that adjustments to the yield curve framework would be unlikely throughout 2023, though he did not rule them out given the Bank’s determination to stress that any such move would not constitute a shift from its overall easy policy stance.

Kameda said the Bank would continue with easy policy. “Governor [Kazuo] Ueda has repeatedly pointed out high uncertainties and he justified maintaining easy policy to ensure the probability of achieving the 2% stability target – that is the BOJ’s logic,” Kameda said, adding that the Governor and BOJ believe the risk of waiting for underlying inflation to rise is not as great as the cost of making hasty policy changes. This is despite the growing side effects of yield curve control, including a lessening of fiscal discipline, he noted.

Recent price rises have added pressure on the BOJ to tweak yield curve control, amid concerns it was losing control over bond pricing and with former-BOJ staffer Eiji Maeda telling MNI last week the Bank could adjust the mechanism in the third quarter. (See MNI INTERVIEW: Ex-BOJ's Maeda Sees YCC Adjustment in Q3). But MNI understands that the Bank’s leadership is determined to keep the overall framework intact for the rest of this year at least.

“Previously, the BOJ judged that the 2% price target wasn’t achieved within the projection period in their outlook reports, but the possibility of achieving it is emerging – that’s a big change,” said Kameda.

But, he added, prices will need to move around 2% in fiscal 2026 and 2027, not just in 2025, for the Bank to consider its target met. “I’m sceptical of the nascent development toward achieving the 2% price stability target as achieving the 2% stable target will be really hard and it will not be achieved easily,” he said. The BOJ will want to see price rises in fiscal 2024 and 2025 fall in line with expectations alongside a virtuous price-wage cycle after cost-push inflation subsides, with wages rising 2% or more, the former chief economist said.

“[The BOJ] gives a specific example – the median core-core inflation forecasts in fiscal 2024 [1.7%] and 2025 [1.8%] will need to approach 2%,” he added. “In addition, uncertainties over prices will fall.” He added the current inflation forecasts in fiscal 2024 and 2025 are close to 2% but Ueda sees downside risks to prices and high uncertainty.

Not even a weaker yen will increase the chances of policy adjustment at the July meeting, Kameda said, noting that such a move would only encourage investors to believe that markets can drive BOJ policy. The Bank only widened its long-term rate target in December at a time of market calm, he noted.

In the longer term, though, higher prices may increase political pressure on the BOJ to adjust its policy, he said, noting that the economy appears solid. “Capital investment remains solid – exports will likely slow but capex will be supported by firm corporate profits amid improvement of the terms of trade,” Kameda said.