MNI POLICY: US Growth In Focus As BOJ Weighs YCC Tweak Risks

Bank of Japan officials have sharpened their focus on the outlook for global growth, especially the U.S. economy, as they assess the risks to Japan's economy from any possible tweaks to monetary policy under the central bank's new leadership, MNI understands.

While the global economic outlook is judged to be better than in January, officials are working to understand the impact on U.S growth from additional Federal Reserve rate hikes ahead of possible changes to the BOJ's yield curve control (YCC) policies under incoming governor Kazuo Ueda. (See MNI BOJ WATCH: Ueda Pledges Easy Policy, Flags YCC Options)

Bank officials see the need to monitor how the U.S. economy and inflation evolves at least until around mid-this year as they hold the key to Federal Reserve deliberations on further rate hikes and the terminal rate. Overnight indexed swaps point to a peak rate of 5.4% this year compared to the current Fed fund rate target of 4.5% - 4.75%.

If the U.S. economy falls does slide into recession, Japan’s exports and production would be pressured by lower external demand, compounding any drag on the economy from possible policy missteps under the governorship of Ueda.

Any tweaks to YCC should not be interpreted as policy tightening as any changes would be aimed at addressing side-effects, such as impaired bond market functioning, rather than reflecting a direct link to domestic economic and inflation outcomes, or the U.S. economic outlook.

But policy tweaks could cause bond yields to rise, which could weaken the impact of easy policy and present a headwind for Japan's economy. The BOJ widened the band around its 10-year yield curve target from 25bp to 50bp in December, with yield hovering near the top end of the band.

The BOJ under the new governor will have to avoid any deterioration in the growth outlook, bank officials argue. Any deviation from a recovery path, even if it is caused by a weaker U.S. economy, that comes after a BOJ policy tweaks would be viewed as premature and a misjudgment, likely triggering political criticism.

WAGES GROWTH

Bank officials are focused on wage hikes among major firms at the spring wage negotiations in mid-March, and they will seek to understand the size of wage hikes at smaller firms through hearings and surveys ahead of the April 27-28 policy meeting. (See MNI POLICY: BOJ Wary Rising Staff Costs May Crimp Wage Growth)

The board will release its first forecast for inflation rate for fiscal 2025 and update the fiscal 2024 inflation view at the meeting.

Wage hikes at smaller firms will be decided after those of major firms and new wages will be paid in or after June. Government data including smaller firms’ wages will be available in early August.