Some Sell-Side Thoughts After Today’s YCC Tweak

Some sell-side thoughts after today’s BoJ YCC tweak

• Goldman Sachs: Unless it looks increasingly likely that inflation will reignite in FY2024, including services, and without having promising outlook for wage hike momentum in 2024, we believe the BOJ is unlikely to gain sufficient confidence in the outlook for sustained 2% inflation for justifying the exit from YCC and NIRP.
• HSBC: While Governor Ueda explained the adjustments to the YCC framework were made on the grounds of enhancing the sustainability of monetary easing, the move today draws parallels with the surprise policy decision in December last year. With the process of deliberating policy normalisation likely accelerated, we now expect the BoJ to remove YCC sometime in 1Q24, while keeping the policy-balance rate at -0.10% through 2024.
• J.P.Morgan: We think the decision today would provide some leeway for the BoJ in terms of seeking the timing of further policy normalization. The rise in volatility in the FX market since the June meeting had put pressure on the BoJ to make a policy adjustment. With today’s decision, however, the BoJ likely will be able to mitigate this pressure to some extent by allowing the rise in long-term yields for some time. The BoJ likely will assess the effectiveness of this decision over its upcoming meetings. However, if inflation continues to remain elevated with rising pressure on wages as we expect, pressure on the BoJ to take further action likely will increase again toward the year-end.
• MUFG: With the BoJ still not confident that inflation can be sustained at their 2.0% target, the BoJ is trying to differentiate today’s decision to make YCC more flexible from any future decisions to tighten monetary policy. Governor Ueda described today’s move as enhancing the sustainability of monetary easing rather than tightening. It sends a signal that the BoJ is not yet ready to tighten monetary policy through raising interest rates.