MNI POLICY: BOJ Officials Mull Recommending July YCC Tweak

Bank of Japan staff are set to increase their inflation forecast for the BOJ’s July meeting and could recommend increasing the 0% rate currently targeted under yield curve control, though it is uncertain Governor Kazuo Ueda would follow such advice, MNI understands.

In their July forecast, officials could revise higher the BOJ’s baseline view, frequently mentioned by Ueda, that the year-on-year rise of core CPI will fall below 2% toward the middle of this fiscal year.

Bank officials expect the BOJ to say in July that there is theoretical justification for raising the long-term policy interest rate from around 0% due to an increase in inflation expectations to at least 1% from around zero and the board’s new price view. Any modification of the target, which could be to 0.75%, would have to be accompanied by a clear explanation of the BOJ’s changing view of trend inflation by Ueda, who has emphasised the need for clear communications.

Still, Ueda has stressed that he regards any premature policy adjustment as riskier than maintaining ultra-easy settings for too long.

Bank officials are also monitoring downside risks to both the global economy and private consumption. And, while prices have risen more strongly than predicted in April, some officials still expect core inflation to slow as lower import prices feed through with a lag. Nor are they confident of sufficient momentum in wages next year. These will be set according to this year’s calendar inflation and will also depend on corporate profits.

Another complication would be if Prime Minister Fumio Kishida calls snap elections, which would delay any move by the BOJ until after the vote, officials concede.

Without a change to the current baseline, officials see no justification for adjusting yield curve control’s parameters, as distortions seen in bond markets before the BOJ’s surprise move to widen its tolerated yield range to -0.5% to 0.5% in December have subsided. But a rise in inflation expectations could prompt such a move.

Ueda acknowledged last Wednesday that the current period of high inflation could change public views on prices, preparing the ground for a departure from "low for long" policy settings. The Governor has also expressed concern over the impact of high prices on consumers, something never mentioned by his predecessor Haruhiko Kuroda, whose term ended in April.

Former BOJ chief economist Toshitake Sekine has already told MNI that he expects the BOJ to raise its 10-year bond yield target to about 1% in June. (See MNI INTERVIEW: Ex-BOJ’s Sekine Sees YCC Adjustment in June)

The BOJ’s baseline view is for the world economy to slow around the middle of fiscal 2023 and Ueda is also wary of the risk of a U.S. recession, which would have an impact on Japan’s exports and production as well as on inflation.