MNI POLICY: US Recession Could Close BOJ Tweak Window

A U.S. recession could close or limit the Bank of Japan's chance to tweak policy or smooth its yield curve control mechanism. While the BOJ will likely not change its settings at the upcoming April 27-28 meeting, newly appointed Governor Kazuo Ueda will scrutinise the U.S. economy's future performance before tweaking the Bank's easy policy settings, MNI understands.

Bank officials are concerned the BOJ's wait-and-see attitude could kill any chance it may have to tweak monetary policy, if the U.S. economy moves into recession. Ueda will scrutinise the U.S. economy, inflation rate and how the heightened uncertainties over global financial markets evolve and impact Japan’s economy over the coming months before tweaking easy policy, MNI understands.

Ueda recently said the BOJ would continue easy policy and YCC as the Bank's 2% price target had not been achieved. He indicated, however, that the rising underlying price trend could lead to the 2% price target (See MNI BRIEF: BOJ's Ueda Says To Consider No More Than YCC Tweaks). Ueda added the BOJ must examine the outlook for the economy and prices, and consider monetary policy adjustments on the back of growing downside risk to global economy.

Ueda’s remarks, which brushed out an imminent policy tweak, contributed to weakening speculation that the BOJ will tweak YCC at the April 27-28 meeting, unless the Bank faces strong upward pressure on Japanese government bond yields. However, Ueda has said the Bank finds fine tuning YCC difficult. Markets price in the next hike if the BOJ widens the the 10-year interest rate range, he stated.

By contrast, the current economic and financial conditions could offer a good opportunity for the BOJ to tweak the YCC as concern over a slower global economy play a significant role preventing interest rates from rising even if the Bank widens or scraps the long-term interest rate, MNI understands. However, any change at the upcoming meeting is highly unlikely (See: MNI BRIEF: Ueda Targets Easy Policy, Price Stability).

COMMUNICATION RISK

Policy action at the April meeting could damage communication with market players. Uchida recently dampened market expectations on near-future policy action, although rapid change of financial markets before the meeting could force the BOJ's hand. Ueda, however, risks being painted as the person aiming to normalise policy earlier than the market expects if he acts at his first policy meeting.

Quick action could also trigger undesirable bond market moves and elicit government criticism. Bank officials believe Ueda will manage monetary policy based on his judgment of the economy and prices and their outlook, but he cannot ignore the government’s intention, despite its support to increase the BOJ's monetary policy flexibility.

In addition, Deputy Governor Shinichi Uchida, former BOJ board member, will want to promote sound government relations if he wants to become the next BOJ governor after Ueda.