MNI INTERVIEW1: BOJ To Modify YCC After June - Kameda
Incoming Governor Ueda will modify or scrap yield curve control but the negative short-term rate won't change, said former BOJ chief economist Seisaku Kameda
New Bank of Japan Governor Kazuo Ueda will likely widen the band around the 10-year bond yield target or possibly scrap the pinpoint long-term interest rate target after the June meeting, a former BOJ chief economist told MNI.
“(Incoming) BOJ Governor (Kazuo) Ueda in confirmation hearings said that he will carefully, politely monitor economic data, so I don’t think the BOJ will act in April immediately after he takes office,” Seisaku Kameda, now executive economist at Sompo Institute Plus, said in an interview.
Widening the band - currently set at ±50bp - around the long-term target of zero percent or even scrapping the long-term target would be an option, Kameda said, although he acknowledged the risks of the BOJ stepping back completely from managing the 10-year yield.
“If the BOJ leaves the 10-year interest rate to entirely markets, there is the risk that the long-term interest rate would surge,” he said.
Kameda's concern follows the surge in the 10-year yield to the top end of the band after it was widened from 25bp to 50bp in December. Ueda told lawmakers during confirmation hearings he was focused on addressing the side effects of yield curve control, such as impaired bond functioning, but did not elaborate on policy options. (See MNI POLICY: Ueda's YCC Concerns Hint At BOJ Policy Shift)
In order to avoid spikes in the long-term interest rate should yield curve control be changed or abandoned, the BOJ will need to send a message to markets that it will not move towards tightening policy and will keep the short-term policy interest rate at its current level of -0.1% by modifying forward guidance, Kameda said.
He said the BOJ would need to pledge to maintain an accommodative financial environment and not implement additional policy changes immediately after any modification or scrapping of yield curve control.
NEGATIVE RATE TO STAY
Kameda said Governor Ueda was unlikely to abandon the negative short term rate given its role as a symbolic anchor of the easy policies embraced during the governorship of Haruhiko Kuroda, who exits on April 8 after a decade as Japan's central bank chief. (See MNI POLICY: BOJ's Ueda To Wait And Watch As 10-Yr Yield Sinks)
“The (short-term) negative interest rate, currently -0.1%, is becoming a dead letter. Even if the BOJ scraps the negative interest rate, its impact on the real economy will not be big. However, the BOJ cannot scrap the negative interest rate easily as it is a symbol of easy policy,” he said.
Scrapping the negative interest rate would be interpreted as the BOJ departing from the easy policies formulated and implemented by Governor Kuroda, he warned.
Kameda's view on the timing of any change to yield curve control has been pushed out by the collapse of Silicon Valley Bank, which has triggered uncertainty about financial stability and the outlook for global interest rates despite the intervention of U.S. authorities, including the Federal Reserve.
“Before the collapse of Silicon Valley Bank, I thought the BOJ would tweak YCC around mid-this year, although I originally didn't expect to see the action in April. But I changed my view in the wake of the collapse of SVB,” Kameda said.
He added the new governor must ascertain the impact of the SVB fallout on markets and the economy before tweaking YCC. He said Ueda will likely move slowly, while carefully monitoring developments domestically and in offshore economies.