MNI POLICY: BOJ's Ueda To Wait And Watch As 10-Yr Yield Sinks

The fall in Japan's 10-year bond rate could make it easier for the Bank of Japan to tweak its yield curve control policy, though incoming governor Kazuo Ueda is unlikely to change policy in April given volatility triggered by the collapse of Silicon Valley Bank and a desire to establish good relations with the government, MNI understands.

The drop in the 10-year bond yield to 0.24% on Tuesday, the lowest level since December, cuts the odds of a hurried policy tweak by Ueda, who starts on April 9. However, the fall in the long-term policy rate could make it easier for the BOJ to either widen the YCC band or abandon the policy without a surge in interest rates. The BOJ widened the band around its 10-year yield target of zero percent to 50bp from 25bp in December.

Should Ueda tweak the YCC policy at the April 27-28 meeting and interest rates then rise, he will immediately be labeled as hawkish and subjected to criticism from reflationary Liberal Democratic Party lawmakers who voted for the 71-year old former academic.

Higher interest rates would dampen stock prices and weigh on the Japan's economic rebound, possibly spoiling hopes for a sustainable recovery and the achievement of the BOJ's 2% price target. Ueda will be alert to avoiding conflict between the government and the BOJ early in his role, likely delaying any tweaks to easy policy amid growing concerns over financial markets. (See MNI BOJ WATCH: Kuroda Entrusts Ueda With Achieving 2% Target)

Ueda spoke of his willingness to mitigate the side effects of yield curve control - such as impaired bond market functioning - in confirmation hearings before lawmakers, although he said it was necessary to continue easy policy to support the economy and help firms raise wages.

SHORT COVERING

The 10-year Japanese government bond yield fell on Tuesday amid global market uncertainty and short-covering. The fall in yields allows Ueda to take a wait-and-see attitude as he said monetary policy needs to be steered by the outlook for growth and inflation.

Ueda and bank officials will have to ascertain the outlook for Japan’s economy and prices amid uncertainty about U.S. inflation and growth. The extent of wage increases is also another issue for Ueda to consider, especially the degree of wage rises among smaller companies. The BOJ is unlikely to have sufficient clarity on both key issues by the April meeting.

Bank officials view the direct impact of SVB's failure on Japan’s financial institutions as limited, but they are paying attention to developments in global financial markets amid uncertainty over the fallout.