The Bank of Japan will deliver its latest policy decision Wednesday, shortly after its massive easing program came under the fiercest market attack in the history of Governor Haruhiko Kuroda’s decade-long term.
(Bloomberg) — The Bank of Japan will deliver its latest policy decision Wednesday, shortly after its massive easing program came under the fiercest market attack in the history of Governor Haruhiko Kuroda’s decade-long term.
All 43 surveyed economists except one forecast a stand pat decision as a base case scenario, after December’s surprise move roiled global financial markets. But an unusually high number of BOJ watchers say they can’t rule out the possibility of another adjustment in the central bank’s yield curve control program.
The question BOJ watchers are now asking is whether the central bank will reaffirm its resolve to defend its yield cap or back down.
Economists say that after December’s surprise decision, it has become unclear how the BOJ will react to developments in the economy, prices and financial markets. Last month the central bank widened its 10-year yield target band despite Kuroda previously characterizing such a move as equivalent to a rate hike, and premature for Japan’s still fragile economy.
The bank had acknowledged the side effects of its massive easing policy for years, but had insisted the benefits outweighed the costs. The yield control program affected market functioning from the moment of its introduction. That leaves the question of when it became necessary to address the problems it generated.
The surprise move has intensified speculation over more tweaks to policy, even before Kuroda steps down in April. So far there’s been little visible improvement in how the bond market operates, despite Kuroda’s insistence that the December move was aimed at enhancing its functioning.
The new target ceiling of 0.5% has been breached for three straight trading days, as investors bet on another hawkish pivot from the BOJ. That jump forced the bank to buy a record amount of bonds. Citigroup economists now expect a scrapping of the entire yield curve control program this week, and hedge funds have been shorting sovereign bonds.
Former BOJ executive director Hideo Hayakawa said a back-to-back adjustment would invite further speculation for more changes to come, and would be embarrassing as it would signal that December’s move was insufficient.
Earlier this month people familiar with the matter said BOJ officials see little need to rush to make another big move to improve market functioning. For now they’re in a period of assessing the impact of last month’s action, those people said.
What Bloomberg Economics Says…
“We expect the Bank of Japan to keep its yield-curve control levers unchanged at its Jan. 18 meeting. But it could resort to operational tactics in an effort to counter upward pressure on JGB yields that has intensified after December’s surprise move.”
Yuki Masujima, economist
Click here to read full note.
The bank’s latest economic projections will also be more closely scrutinized than previous quarterly outlooks, after Japan reported the hottest inflation in four decades. The nine-member board is expected to raise its forecasts for each of the three years through fiscal 2024, in a sign of progress toward its price target of 2%.
Kuroda has said the current inflation is mainly led by cost-push factors. Before the BOJ takes any normalization steps, higher wage growth must emerge to make inflation sustainable, he has said.
The BOJ typically releases its policy statement and quarterly inflation forecast around noon, followed by Kuroda’s press briefing at 3:30 p.m.
What to watch for
- Another expansion of the yield band to 0.75% or higher or the ditching of YCC altogether are among possible actions many analysts cite as risk scenarios. Such moves would likely push bond yields up, strengthen the yen and lower stock prices outside the banking sector.
- Even if there is no action taken this time, any sign of upcoming change will be closely watched. Many economists brought forward their policy shift expectations to around when the new governorship will start.
- Forecasting no policy change, JPMorgan’s Ayako Fujita expects the BOJ to try to contain speculation over another adjustment. In doing so, the bank could indicate the desirable shape for the yield curve to help influence market expectations, she said.
- The bank may stress its message of buying more bonds and using various tools to keep yields under control. Earlier this month, the bank conducted a funds-supplying operation against pooled collateral that will last for two years. That was the first time that particular tool was used since the BOJ extended the maximum duration of operations to 10 years, when YCC was introduced in 2016.
- The BOJ’s new projection for consumer prices excluding fresh food may hit 2% or above for fiscal 2024, mainly due to base effects as government measures lower utility bills in fiscal 2023. With an expected roller coaster move in the price data, the bank may indicate it’s more important to look at consumer prices that exclude both fresh food and energy.
(Updates with Japan’s 10-year yield move.)
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