MNI POLICY: BOJ ​Policy Shift, Joint Statement Hinges On Wages

The Bank of Japan could discuss changes to its easy policy framework as early as June as the government considers revising its joint statement with the central bank on its inflation target, with a mid-year timeframe allowing the new governor time to conduct a policy review and assess wages growth, MNI understands.

The BOJ board could announce a policy review in April after appointing a new governor and release the outcome in June, when economic data may provide the evidence needed to support a change in the joint statement which currently stipulates the BOJ should meet its 2% target at the "earliest date possible", a wording that contrasts sharply with inflation rising at the fastest pace in four decades. (See MNI INTERVIEW: BOJ's 2% Target Isn't "Appropriate" - Yamamoto)

The joint statement, which was inked in January 2013, is viewed by the Prime Minister’s office as needing to be revised to be more flexible as inflation is hurting households and the BOJ’s rigid focus on its 2% price target has delivered adverse side-effects such as a weaker yen and diminished liquidity in Japanese government bonds. (See MNI POLICY: BOJ Eyes 2023 CPI As Trigger For Policy Tweaks)

However, officials say there are preconditions that must be met before any policy change. These include no sharp and significant fall in global growth, especially in the U.S., and that wages growth must be confirmed to be trending higher. If these conditions are not met, then any shift in policy is unlikely.

The BOJ has traditionally conducted comprehensive assessments before committing to policy changes. There is the possibility that the BOJ maintains its yield curve control policies but offers more flexibility within that framework. (See MNI POLICY: BOJ Needs More Flexibility As Easing Maintained)

One possible option is the BOJ scraps its easing bias policy but vows to keep interest rates at low levels and strongly signal that it does not mean policy tightening. The BOJ could scrap the easing bias in its forward guidance in March when the BOJ’s special funding measure to support firms through Covid-19 is set to end.

Should the BOJ scrap its negative interest rate policy, which sets short term rates at -0.1%, the bank would likely keep the short-term interest rate at zero per cent to support an environment that enable firms to raise wages in a sustainable manner.

As for any change to the 10-year interest rate target, which caps 10-year yields at 25bp, the BOJ would communicate its intended policy change and gradually leave the pricing of 10-year yields to markets. However, the BOJ is alert to the risk that interest rates may surge due to its decision. The BOJ may place a 1% upper limit on 10-year yields and the bank may pledge to continue to buy Japanese government bonds at a fixed-rate without a limit.

A major focus in on how BOJ revises the wording around short- and long-term policy interest rates, as well as the transition in its forward guidance to neutral from easing.