MNI POLICY: BOJ To Tweak Guidance If Covid Severity Downgraded

Considerations by Japan's government to reclassify Covid-19 in the same category as seasonal flu will likely prompt the Bank of Japan to remove “while closely monitoring the impact of Covid-19” from its forward guidance, MNI understands.

The BOJ is instead expected to state it is closely monitoring developments in overseas economies that are set to slow due to the rate hikes. Officials see the degree of global economic slowdown as the biggest risk factor for Japan’s economy and inflation outlook.

Prime Minister Fumio Kishida is considering a reclassification of the severity of Covid but no decision has been made. The BOJ will not tweak its guidance until an official announcement.

Should the BOJ remove Covid-19 from its forward guidance, the bank will likely keep its warning of Covid-19 abroad as a risk to the outlook as China's economy has been hit by a surge in infections. Downside risks to growth are likely to prompt the BOJ to continue to reiterate its expectation that “short- and long-term policy interest rates to remain at their present or lower levels.”

The removal of the wording may be interpreted to mean the bank has shifted its policy bias to neutral from easing, which would destabilise financial markets. The BOJ is expected to respond by pledging to keep interest rates at low levels and repeat it “will not hesitate to take additional easing measures if necessary.”

The BOJ maintained it easy policy settings after meeting earlier this week, keeping the 50bp band around its 10-year yield target. Easy policy was viewed as necessary to support Japan's economy. (See MNI BOJ WATCH: Kuroda Dismisses Market Speculation On YCC Hike).

“With regard to the risk balance, risks to economic activity are skewed to the downside for fiscal 2022 and 2023 but are generally balanced for fiscal 2024. Risks to prices are skewed to the upside,” January's Outlook Report said.