The Bank of Japan (BoJ) has recently taken a significant step toward dismantling its easy monetary policy. In an effort to enhance the sustainability of its accommodative policies, the central bank has made its yield curve control more flexible. This move comes with several notable changes:
Increase in 10-Year Bond Yields
The BoJ has decided to allow 10-year Japanese bond yields (TMBMKJP-10Y, 0.550%) to reach as high as 1%, surpassing the previous threshold of 0.5%. This adjustment signals a shift in the central bank’s approach to interest rates.
Revised Inflation Forecast
Additionally, the BoJ has raised its inflation forecast for fiscal year 2023 to 2.5%, marking an increase of 0.7%. This adjustment further reflects the central bank’s efforts to recalibrate its monetary policy stance.
Commitment to Easy Monetary Policy
Despite these changes, Bank of Japan Governor Kazuo Ueda has emphasized that the central bank will still maintain an easy monetary policy stance. This reassurance aims to prevent any expectations of further tightening and ensures that Japan’s monetary environment remains relatively loose.
Financial analysts have shared their insights on the BoJ’s policy adjustment:
Ryota Sakagami, an equity strategist at Citi, believes that the BoJ’s shift is primarily focused on enhancing the sustainability of its current policies. He anticipates little potential for expectations of further monetary tightening and suggests that the current appreciation of the yen and decline in share prices is unlikely to become a sustained trend.
J.P. Morgan’s Assessment
Krupa Patel, head of international market intelligence at J.P. Morgan, draws parallels between this policy adjustment and the BoJ’s de facto exit from exchange-traded fund purchases in 2018. Patel speculates that the central bank will gradually reduce its Japanese Government Bond (JGB) purchases while allowing 10-year yields to gradually rise over time.
Overall, these expert analyses shed light on the significance of the BoJ’s recent policy adjustment. As the central bank continues to navigate the complexities of monetary policy, market participants can expect a gradual shift in the yield curve control framework and its implications for Japan’s economy.
Dismantling the YCC: A Slow Path for the Yen
Kit Juckes, chief currency strategist at Societe Generale, highlights that the Bank of Japan (BOJ) has not raised its inflation forecasts for 2024 and 2025. This lack of confidence in defeating deflation is evident. However, Juckes suggests that the central bank acknowledges the risks associated with its yield curve control (YCC) policy.
YCC, which has kept Japanese Government Bond (JGB) yields anchored, stands in contrast to other major central banks that have been increasing rates. Over time, this has led to the yen’s real value hitting its lowest level since the 1970s. As a result, the BOJ aims to dismantle YCC cautiously, anticipating a slow progression for the yen’s rally. This means that there is currently limited upside to USD/JPY. Nevertheless, any decline is expected to be gradual until global bond yields start trending significantly lower.
Juckes explains, “For the moment, that means there is little upside to USD/JPY, but the fall from here is also likely to be very slow, until the global trend in bond yields turns decisively lower.”
Meanwhile, JPMorgan’s Patel points out that the modest 0.4% decline in the Nikkei 225 NIK is testament to the strength of the ongoing Japanese bull market. Investors view any indication of BOJ policy normalization against an economy transitioning from a long period of disinflation to a more normal inflationary cycle as ultimately positive.
As of now, the dollar is valued at 139.59 yen, denoting a 6% increase against its Japanese counterpart this year.