By Max Sato
(MaceNews) – Bank of Japan policymakers are likely to consider making the yield curve control framework even more flexible at their meeting this week by allowing the 10-year bond yield to trade above 1% “to some extent,” the upper end of its range the BOJ expanded in July, the Nikkei newspaper reported late on Monday.
The idea of conducting “flexible” market operations to buy 10-year Japanese government bonds at a fixed rate “has surfaced” at the bank, the Nikkei said.
The BOJ’s nine-member board began its two-day policy meeting on Monday afternoon, focusing on the economic and financial conditions in Japan and overseas. The board will discuss the conduct of monetary policy on Tuesday from 0900 JST (0000 GMT Tuesday or 2000 EDT Monday) for over two hours.
The bank is expected to announce the results of the meeting sometime between 1130 and 1300 JST on Tuesday (0230 and 0400 GMT the same day/2230 and midnight EDT Monday).
At its previous meeting on Sept. 21-22, the policy board decided unanimously to maintain its monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve as well as large asset purchases to continue seeking stable 2% inflation and support sustainable wage growth.
In July, the board decided in an eight to one vote to make the bank’s existing reference range for the 10-year bond yield more flexible, basically keeping the range of minus 0.5% to plus 0.5%, but expanded its ultimate defense lines to minus 1.0% and plus 1.0% in market operations. The July vote on the overall easing stance was unanimous.
Last month, the bank repeated its July decision that it will offer to buy 10-year Japanese government bonds at 1.0% every business day through fixed rate purchase operations unless it is highly likely that no bids will be submitted. Previously, the bank had been offering to buy long-term bonds at a fixed rate of 0.5%.
The 10-year JGB yield has traded close to 0.9% and the yen has depreciated beyond Y150 to the dollar as the interest rate differential remains wide between the U.S. and Japan.
By providing “greater flexibility” to its market operations, the bank hopes to avoid being forced to abandon the yield curve control policy framework when long-term interest rates come under persistent upward pressures. It also hopes to allow a natural uptick in long-term interest rates that reflects economic recovery with substantial wage hikes and mitigate the negative impact of artificially suppressing interest rates, which has paralyzed bond market functions and could negatively affect other financial markets.
Governor Kazuo Ueda told a post-meeting news conference last month that the bank’s policymakers “cannot possibly pre-determine the timing of policy change or specific responses,” reminding that it may take some more time before clear indications for continued substantial wage hikes and stable 2% inflation emerge.
Ueda also said the risk of under-easing is still greater than over-easing because Japan has experienced years of deflation and low inflation.
On Tuesday, the bank is expected to maintain its recent assessment that “there are extremely high uncertainties” surrounding Japan’s economy. It is likely to add the Israeli-Palestinian war to the list of risk factors that also include developments in overseas economic activities and prices, commodity prices as well as domestic firms’ wage- and price-setting behavior.
In the quarterly Outlook Report due after the Oct. 30-31 meeting, the BOJ board’s median forecasts for the core CPI (excluding fresh food) for fiscal 2023 and 2024 are likely to be revised up but their projection for fiscal 2025 is expected to remain under the bank’s 2% target.
The board is expected to decide in a unanimous vote to maintain its overall monetary easing stance under the yield curve control framework that it adopted in September 2016, vowing to keep zero to negative interest rates “as long as necessary” to achieve its 2% inflation target in a stable manner.
Under the current framework, the BOJ is keeping the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent by buying “a necessary amount” of Japanese government bonds “without setting an upper limit,” and to keep the overnight interest rate at minus 0.1% by charging 0.1% interest on a part of cash reserves parked at the bank by financial institutions.
The bank has a commitment to “continue expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI, all items less fresh food) exceeds 2% and stays above the target in a stable manner.”