MNI POLICY: BOJ Shrugs Off JGB Yields, Yen Strength
MNI (TOKYO) - The Bank of Japan believes the recent rise in Japanese government bond yields and the strengthening yen will have little immediate impact on the economy, prices or the potential for future rate hikes, holding firm on its 1% neutral rate estimate, MNI understands.
BOJ officials doubt the market’s assumption that the neutral rate is likely around 1.25%, higher than the Bank’s lower-bound 1% estimate, a key factor behind the recent rise in 10-year JGB yields to 1.440% on Thursday – their highest level since 2009 – from Feb 10’s 1.305%.
The BOJ’s bond holdings – which stood at JPY586 trillion on Feb 10 – and its lack of a plan to lower the balance drastically, will also continue to temper JGB yields, officials believe.
Significant uncertainties ahead make forecasting the neutral rate problematic and the BOJ sees no sufficient evidence to justify the market’s higher estimate, with officials standing by their previous 1-2.5% neutral rate forecast range, ruling out any upward revision unless the economy and prices evolve. (See MNI POLICY: BOJ Fears Neutral Lower Than Previously Estimated)
BOJ READY
Governor Kazuo Ueda told the Diet Friday the Bank would buy bonds nimbly should yields rise sharply, seeking to temper JGBs and the yen. The 10-year JGB yield rose to 1.455% on the back of stronger core CPI, which accelerated 20 basis points to 3.2% in January, but fell following Ueda's comments.
The BOJ is focused on whether the 10-year bond yield shows signs of rising toward 2% rapidly and it stands ready to act should a sharp increase adversely affect economic activity.
While the dollar fell to JPY149.40 in New York trading on Thursday – its lowest level since December 2024 – it is still weaker than it was last October, keeping upward pressure on inflation.
The Federal Reserve will likely pause easing following recent sticky inflation, which will prevent further sharp yen appreciation despite additional BOJ hikes.
Real interest rates will remain negative should the Board choose to hike the policy rate another 25bp to 0.75%, but BOJ officials have found gauging the impact of such a move on financial markets and sentiment challenging, as an additional increase would fuel speculation over a 1% policy rateand could force the BOJ to temper yields preemptively via bond purchases.
While Bank officials acknowledge price moves are deviating from the BOJ’s forecasts, they see no evidence yet of a wage-price spiral. Temporary factors have boosted inflation and officials are studying whether these drivers feed into underlying inflation, and increase the upside risk to prices.