MNI POLICY: BOJ To Keep Yield Curve Control This Year

There is no prospect that the Bank of Japan will scrap yield curve control this year, because even if policymakers become confident of a virtuous cycle between wage hikes and price rises they would still want to avoid any sharp rise in interest rates, MNI understands.

Whilst it is possible that the BOJ could adjust the parameters of its yield curve policy, perhaps by modifying the zero percent target rate at the centre of its -0.5% to 0.5% tolerance band for the 10-year bond, this would only be to mitigate unwanted bond market distortions. Officials are confident that the yield curve framework will stay in place for longer than expected by investors or private economists, some of whom are betting that the policy will be abandoned as early as the third quarter of this year. (See MNI POLICY: BOJ Officials Mull Recommending July YCC Tweak)

For the moment, officials do not expect further upward pressure on Japanese government bond yields, given that the global economy is likely to slow toward the end of this year, and not recover momentum until early in 2024.

DECEMBER MISTAKE

The BOJ fears that dropping yield curve control would be misinterpreted as a move away from easy policy, driving rate expectations and the yen higher, and these concerns have only intensified since what officials regard as an exaggerated market reaction to the surprise move under former Governor Haruhiko Kuroda to widen the yield curve tolerance band in December. New Governor Kazuo Ueda has emphasised that he regards the dangers to the BOJ’s inflation target of premature tightening as greater than those posed by keeping policy too easy, a view shared by most board members.

Officials are currently focused on this week’s Federal Reserve meeting, which will be a key factor for their own meeting ending on Friday. While the BOJ regards the U.S. economy as solid despite cumulative monetary tightening, officials are concerned by the possibility of a serious downturn as real rates rise and consumers’ cash reserves are eroded. (See MNI BOJ WATCH:Upside Inflation Risks Build Before New Forecast)