Bank of Japan board members will likely discuss whether to tweak forward guidance along with the yield curve control mechanism when they gather later this month, according to a former executive director in charge of monetary policy.
(Bloomberg) — Bank of Japan board members will likely discuss whether to tweak forward guidance along with the yield curve control mechanism when they gather later this month, according to a former executive director in charge of monetary policy.
“Japan’s long-term yields have already risen to 0.8%,” Kazuo Momma, currently an executive economist at Mizuho Research & Technologies, said in an interview Thursday. “Even if it’s not stuck at the ceiling of 1%, it will be a topic of discussion whether the current ceiling would be reasonable if there’s more upward pressure going forward.”
BOJ officials responded to upside risks to inflation by essentially raising the upper limit for 10-year bond yields when they met in July, in the first surprise move under Governor Kazuo Ueda. Momma said that while it’s not his base-case expectation, the board could take similar action again due to a recent rise in yields, the yen’s slide and inflation consistently coming in stronger than expected.
Momma spoke as the yen traded around 149 to the dollar, near a key psychological threshold at 150 and not far from the weakest in more than three decades, helping to spur cost-based inflation that weighs on consumer spending.
At the same time, Japanese government bonds have come under intense selling pressure as inflation at home and soaring Treasury yields prompt traders to bet the BOJ will make a policy shift sooner rather than later. The central bank has taken extra measures to slow the moves, boosting bond purchases, but long-term yields still touched decade-highs this week.
In terms of potential steps, Momma said the BOJ could raise the rate for its daily fixed rate operation from 1% or lift its target rate for 10-year bond yields to 0.25%, while also pushing the upper limit higher.
“There won’t be an end to the negative rate and YCC in October, as they are linked to the 2% inflation target that hasn’t been achieved,” Momma said. “But there is a certain degree of freedom to adjust policy for long-term yields.”
Authorities might also adjust their forward policy guidance, eliminating a pledge to “not hesitate to take additional easing measures if necessary,” according to Momma, who also served as the BOJ’s chief economist during his tenure. Some economists expected such a move at last month’s meeting.
“The chances are extremely slim for any additional easing to be necessary under current economic conditions,” Momma said. “I think they can cut that wording, and there is a good chance they will consider doing so.”
Still, Momma doesn’t consider those changes in YCC and forward guidance to be his base case for the next meeting, which ends on Oct. 31. While the BOJ will probably once again raise its inflation projection in its updated outlook report, its main message will be that it can’t yet be confident enough to say the inflation target is finally in sight, said Momma, who left the bank in 2016.
April is the most likely timing for the BOJ to end the negative interest rate if the initial results of spring wage negotiations in March point to sustained and robust wage growth, and it would be logical for the board to end YCC and the subzero rate at the same time, he said.
Half of economists surveyed by Bloomberg expect the bank to ditch the sub-zero rate at some point during the first half of 2024, with April being the most likely month in their predictions.
The BOJ will probably need to see indications that the annual wage talks may result in an increase of around 3.58%, the result for this year, and the biggest rise in three decades, Momma said. He thinks the chances of that happening are 50-50.
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