MNI POLICY: BOJ Aims To Gradually Guide Rates Higher

The Bank of Japan will gradually guide the yield on 10-year bonds to levels above 2% if it reaches its 2% inflation target sustainably, but will also seek to ensure that the increase is slow enough to give commercial banks time to adjust, MNI understands.

With the revised inflation view in the BOJ’s latest Outlook report indicating that the Bank could decide whether it has achieved its target by April, or even by March, it moved to further loosen its yield curve control framework on Oct 31, declaring that it no longer regarded 1% to be a cap for 10-year bond yields but merely a reference value. (See MNI BOJ WATCH: BOJ Relaxes YCC, Sees Limited Rise In Yields)

Still the Bank made clear it would push back against any sharp rise in yields, with Governor Kazuo Ueda saying, while the BOJ would tolerate an increase in line with fundamentals, he did not expect to see them going sharply above 1%.

The Bank continues to make large-scale purchases of JGBs, though it has suspended its daily fixed-rate bond-buying operations as it prepares for an exit from ultra-easy policy. A slow rise in yields should avoid financial system disruption, and be tolerated by commercial banks without prompting concerns over losses on their bond holdings, officials calculate.

The BOJ’s meeting next April 25-26, when it will reveal its first inflation projection for fiscal 2026, looks to be the likeliest point for a significant policy shift, but this could also potentially come the month before, depending on economic and financial data.

At its meeting this week, the BOJ board’s median forecast for core-core CPI in fiscal 2025 was revised to +1.9% from July’s 1.8%, with six out of nine board members assessing upside and downside risks as being balanced. But the revision stopped short of raising the outlook to the target level, with policymakers still awaiting confirmation from data and monitoring developments in the U.S. economy.

With labour shortages strengthening, but a slowing year-on-year rise in core CPI, the BOJ will closely watch data on 2024 wage hikes by bigger companies, available closer to the end of the year, and then in mid-March the first survey results on hikes by companies including smaller firms by the Rengo Trade Union Conference. Major companies agreed to average pay hikes of 3.58% this year, the highest increase in three decades.