Bank of Japan Governor Kazuo Ueda is expected to leave overall monetary stimulus unchanged at his first policy meeting Friday, with investors focused on what might be his opening changes after the BOJ’s first leadership transition in a decade.
(Bloomberg) — Bank of Japan Governor Kazuo Ueda is expected to leave overall monetary stimulus unchanged at his first policy meeting Friday, with investors focused on what might be his opening changes after the BOJ’s first leadership transition in a decade.
Almost 90% of economists surveyed expect no change in the settings for interest rates and asset purchases at the end of the two-day gathering, although some of them warn there is a risk of adjustments to the yield curve control. Some 11% forecast a policy tweak and 2% predict a tightening step.
Ueda consistently showed a dovish bent during a series of parliamentary hearings this week, further cooling speculation over any major tightening at an early stage. Still, with the memory of surprises from Ueda’s predecessor Haruhiko Kuroda etched on their minds, traders remain on high alert for any shocks emerging from Ueda’s debut meeting.
Ueda took the BOJ’s helm on April 9, inheriting a massive easing program which Kuroda spent $11.7 trillion on over ten years. Just a small tweak to policy would be enough to jolt global financial markets, as was demonstrated with December’s widening of the long-term yield band.
For market players, a critical point is whether it’s safe to trust Ueda’s words that he’ll continue with ultra-easy policy. It’s difficult to fully commit their trust, given that any change to the YCC framework is expected to come as a surprise, in order to avoid a massive bond selloff before the decision’s officially made.
So far BOJ officials are wary of tweaking or scrapping their control of government bond yields so soon after a global banking crisis clouded the outlook, people familiar with the matter told Bloomberg last week.
The forward guidance is also receiving much attention. It still mentions Covid-19, although its classification is set to be downgraded to the same level as seasonal influenza from May 8, signaling a further step out of the pandemic for Japan. The BOJ let its Covid funding program end as scheduled last month, and some believe that the reference to Covid-19 in the guidance could be scrapped.
Ueda is known to have played a leading role in creating the concept of the forward guidance when he was one of nine BOJ board members from 1998-2005. If there’s no change in guidance, that would underscore Ueda’s cautious approach.
The policy statement usually comes out around noon, together with a quarterly economic outlook report this time. Ueda is likely to hold a press conference at 3:30 p.m.
What Bloomberg Economics Says…
“It’s hard to see Ueda steering a new direction just out of the gates. The economy is too weak and the 2% inflation target isn’t secure.”
— the Asia economists team
Click here to read the full report.
What to look for
- Economists are closely looking at figures in the updated economic projections to gauge where the BOJ stands on its progress toward its sustainable 2% inflation target. The price outlook for fiscal 2025 will be released for the first time, and will be under particularly close scrutiny.
- Ueda has reiterated his view that inflation is expected to fall below 2% from around the fall this year, in an indication that the outcome of the nation’s key spring wage talks wasn’t enough to create sustainable price gains. The inflation forecast that excludes both fresh food and energy is likely to be a more useful guide to gauge underlying price trends, given that there’s less impact from temporary government measures to cap energy prices.
- Ueda and his deputy Shinichi Uchida have indicated their willingness to conduct a longer-term policy review. The market focus is moving more toward the timing of the review announcement, rather than whether there will be one. With past reviews resulting in policy adjustments, the decision could fuel speculation for changes to come.
- Mizuho Bank and Deutsche Securities are among those flagging the risk of a shift in the YCC after upward pressures for global bond yields have eased. Bank of America analysts estimate 10-year yields to potentially shoot up by about 80 basis points if the YCC is scrapped.
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