MNI POLICY: April YCC Removal Window Possible On Wage Data

Data confirming the sustainability of wage hikes in fiscal 2024 could create conditions conducive to the removal of yield curve control next April, MNI understands.

The opportunity could arrive once Bank of Japan policymakers update their economic growth and inflation projections, following fiscal 2024 wage data that encompasses smaller firms in particular. Sustainable wage hikes will enable policymakers to revise up core and core-core consumer price indexes from 1.6% and 1.8% in fiscal 2025, close to the bank’s 2% target, potentially paving the way for the BOJ to drop YCC.

Bank officials expect the outlook for major-firm wage hikes to be available toward the end of this year. As those firms post hefty profits, they will pre-emptively announce raises to placate workers. Bank officials find smaller-firm wage hikes harder to gauge.

Bank economists will refrain from revising fiscal 2025 inflation before the Japanese Trade Union Confederation (Rengo) makes fiscal 2024 wage data available via the first wage survey in early March 2024. (See MNI BRIEF: Wage Hike Chances Rise, Rengo Survey In Focus - BOJ)

PRECONDITIONS & CAVEATS

However, preconditions exist, such as the performance of offshore economies and the continued recovery of private consumption. Bank of Japan officials want to ensure an environment that will enable firms to raise wages remain sustainable.

Should the BOJ drop YCC, it would also commit to restrict a sharp rise in interest rates through all possible measures, although it would tolerate them somewhat reflecting economic and price views. The removal of the framework will also not necessarily mean the end of negative interest rates, unless the BOJ faces rapid and excessive price rises. However, the BOJ may scrap its inflation overshooting commitment, MNI understands. Any removal of YCC will also mean the BOJ will solely target the overnight call loan rate as its policy rate, dropping its target of the long-term interest rate.

At July's BOJ meeting, five out of the nine board members noted upside risks to prices this fiscal year and in fiscal 2024, but that number reduced to two when they considered fiscal 2025. Governor Kazuo Ueda also remains cautions. He has stated the Bank should conduct monetary policy based on a risk-management approach, which assesses both upside and downside risks and weighs the associated costs. Ueda must ascertain the risk of a downturn in prices in fiscal 2024 and 2025 before considering YCC’s removal.