MNI POLICY: Weaker Yen To Raise Pressure On BOJ To Move On YCC

A weaker yen would put pressure on the Bank of Japan to move more quickly to increase the flexibility of its yield curve control framework, though the Governor Kazuo Ueda would be reluctant to make such a move soon and remains determined to stick to ultra-easy policy settings, MNI understands.

While the yen has fallen past 140 to the dollar amid market nerves over the U.S. debt ceiling, the BOJ is not as anxious as it was in October 2022 when USDJPY depreciated rapidly to JPY151 – the lowest level in 32 years, contributing to the Bank’s move in December to widen the target range for the 10-year yield. Last year’s depreciation raised the prospect of higher import prices, leading to political pressure on the BOJ from the government, but the present currency move is more modest and Bank officials see global inflation rates falling.

While some former officials expect the BOJ to further modify its yield curve framework in order to preserve the functioning of bond markets, Bank officials would in any circumstances stress that such a move would not imply a move away from easy policy settings. (See MNI INTERVIEW: Ex-BOJ’s Sekine Sees YCC Adjustment in June)

MAIN SCENARIO

The BOJ’s main scenario is for CPI inflation to decelerate below its 2% target toward the middle of fiscal 2023. (See MNI BRIEF: High Chance Core CPI Will Fall Below 2% - Ueda),

The BOJ’s forecast for core CPI and core-core CPI is set to be revised up from April’s 1.8% and 2.5% in July when the policymakers update the medium-term price view in the wake of ongoing pass-through of cost increases. An import price rise due to the weaker yen will add upward pressure on prices, making it more difficult for the BOJ to maintain the view that the rise in inflation is temporary and easy policy must be maintained.

Prices of 3,322 food items will be raised in June, up from 824 items in May and 5,116 items in April, according to surveys by the Teikoku Databank.