MNI INSIGHT: BOJ Needs To Set The Stage For A JGB Band Review

The Bank of Japan needs to review the impact on business fixed investment decisions of possibly widening the 50 basis points 10-year bond yield curve band in the face of expected sustained higher cost-push prices later this year to avoid losing credibility on its monetary goals, MNI understands.

Any move to widen or tweak the -0.25% to +0.25% benchmark Japanese Government Bond (JGB) range means revisiting a March 2021 analysis that “business fixed investment is more or less unchanged, except when the range of fluctuations in 10-year JGB yields over the preceding six months exceeds 50 basis points.”

At the end of March the BOJ successfully defended the upper limit of the band through unlimited JGB purchases.

Still, pressure will grow on the BOJ to defend the 10-year range, and longer and shorter dated tenors, in the months ahead if the U.S. Fed moves quicker and higher on rate hikes. The mix of economic conditions could prompt a reconsideration of JGB yield range if consumer inflation remains high MNI understands.

CHANGE IMPLICATIONS

But any change from the strong stance of BOJ Governor Haruhiko Kuroda to keep easy policy intact risks the commitment to overshoot the inflation target and ignore cost-push inflation as temporary. It also potentially raises coordination questions with the government on economic policies and on how to address a weaker yen.

BOJ economists are also concerned that energy costs will lift consumer price to around 2% in or after April for a sustained period and at a time when the economy faces headwinds because of measures to curb the pandemic and retail prices are not driven by demand-pull from higher wages, see: MNI INSIGHT:BOJ To Draw On Tankan's Sustained Price Rise Views.

The BOJ March Tankan showed that corporate output prices rose to a record +2.1% in March from 1.2% in December, though BOJ economists suggest the June Tankan reading is crucial to confirm the outlook.

As well, the BOJ wants to understand industry and household views that show a shift from a deflationary mindset among companies and households before any policy review.