–Vote on Making Yield Curve Control More Flexible Is 8-to-1
–Board Member Nakamura Dissents Again, Should Wait Until Bank Can Confirm Firms’ Earning Power Is Up
–BOJ Board Keeps Basic Easing Stance Unanimously To ‘Patiently’ Pursue Stable 2% Inflation
By Max Sato
(MaceNews) – The Bank of Japan said Tuesday its policy board decided in a majority vote to make its seven-year-old yield curve control framework “more flexible” by calling its desired 1% upper end of the 10-year Japanese government bond (JGB) yield a “reference,” instead of a definite line that the bank has been trying to defend with market operations.
At the same time, the BOJ board voted unanimously to maintain its basic monetary easing stance, keeping its long-term interest rate target officially “around zero percent” and the target for the overnight rate at minus 0.1%, with large asset purchases intact, in a decade-long campaign to achieve stable 2% inflation with sustainable wage growth.
The flexibility decision means the bank “will control the yields mainly through large-scale JGB purchases and nimble market operations.” The visual image provided by the bank shows the 1% upper end is now a fine dotted line, instead of the bold red defense line that it had set in July to protect with massive fixed-rate bond buying operations.
Since then, the 10-year JGB yield has been pushed up by the spillover effect of a spike in U.S. long-term bond yields that was triggered by the notion that the Federal Reserve will have to raise interest rates more to bring inflation back to target.
On Tuesday, the bank dropped its July decision to 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. This type of market operation “will have strong positive effects, but could also entail large side effects,” the bank said.
Board member Toyoaki Nakamura, a former Hitachi executive with finance and accounting experience, dissented, although the bank said that he is “in favor of the idea of further increasing the flexibility.”
Nakamura argued that it would be better to confirm that firms’ earning power is rising in data, such as the Ministry of Finance’s quarterly business survey, before allowing greater flexibility in the conduct of the bank’s yield curve control.
He made the same argument about three months ago, when he was against the timing of the bank’s first phase of making the yield curve control framework more flexible.
In July, the board decided in an eight to one vote to make the bank’s 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.
Patiently Pursuing Stable 2% Inflation with Monetary Easing
The bank stressed that its accommodative monetary policy stance is necessary to complete its mission that began a decade ago.
“With extremely high uncertainties surrounding economies and financial markets at home and abroad, the bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions,” it said. “By doing so, it will aim to achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increases.”
This statement was first issued in April and has been repeated at every meeting since then. It indicates that the bank could adjust its yield curve control framework to allow slightly higher interest rates in a gradual shift toward an eventual exit from a decade of large-scale monetary easing.
Governor Kazuo Ueda, who took office in April, 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.
BOJ See Modest Economic Recovery, ‘Extremely High Uncertainties’
“Japan’s economy is likely to continue recovering moderately for the time being,supported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies,” the bank said in its quarterly Outlook Report for October, repeating the summary of its July report.
“Thereafter, as a virtuous cycle from income to spending gradually intensifies, Japan’s economy is projected to continue growing at a pace above its potential growth rate,” which is estimated to be zero to 0.5%, the bank said, repeating its July projection.
The BOJ revised up its inflation outlook, saying the year-over-year rate of increase in the core consumer price index (excluding fresh food) is likely to be above 2% through fiscal 2024 ending in March 2025, “mainly due to the remaining effects of a pass-through to consumer prices of cost increases led by the past rise in import prices and the effects of the recent rise in crude oil prices.”
In fiscal 2025, the bank expects the cost pass-through impact to wane but toward the end of its projection period (through March 2026), “underlying CPI inflation is likely to increase gradually toward achieving the price stability target, as the output gap turns positive and as medium- to long-term inflation expectations and wage growth rise.”
Looking ahead, the bank also repeated its recent assessment that “there are extremely high uncertainties” surrounding Japan’s economy including developments in overseas economic activities and prices, commodity prices as well as domestic firms’ wage- and price-setting behavior.
“Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices,” the BOJ said. The yen remains relatively weak as the U.S. Federal Reserve has been fighting inflation with rate hikes while the BOJ has maintained monetary easing.
Board Still Sees Below 2% Inflation, Slow 1% GDP Growth in Fiscal 2025
In the July Outlook Report, the BOJ board revised up its forecast for inflation for the current fiscal year further and jacked up its projection for fiscal 2024. It still sees inflation below its 2% target in fiscal 2025
“With regard to the risk balance, risks to economic activity are generally balanced for fiscal 2023 and 2024 but are skewed to the downside for fiscal 2025,” the bank said. In July, it said the risks were skewed to the downside for fiscal 2023 but were generally balanced thereafter.
“Risks to prices are skewed to the upside for fiscal 2023,” it said.
For fiscal 2023 ending in March 2024, the median forecast for the year-over-year increase in the core consumer price index (excluding fresh food) is 2.8%, up from 2.5% forecast in July. It will be lower than the 3.0% spike seen in fiscal 2022 but much higher than the 0.1% rise in fiscal 2021 and the 0.4% drop in fiscal 2020.
The board’s inflation projection for fiscal 2024 is 2.8%, up sharply from 1.9% in July. Its forecast for 2025 is 1.7%, compared to 1.6% provided in July. This indicates that the banks’ battle to reflate the economy will remain prolonged.
The spike in consumer inflation to above 4% at the start of the year is mostly due to elevated energy and commodities costs aggravated by the relatively weak yen. The core CPI eased to a 3.1% annual rate in February and March after surging to a 41-year high of 4.2% in January. Inflation fell to a 13-month low of 2.8% in September from 3.1% in August.
The board’s median economic growth forecast for fiscal 2023 is 2.0%, revised up from 1.3% projected about three months ago. By contrast, its GDP forecast for fiscal 2024 is at 1.0%, revised down from 1.2% previously. The board expects the economy to grow at 1.0% in fiscal 2025, unchanged its July forecast of 1.0%.
Basic Easing Policy Stance in Place
At its two-day meeting that ended at 1220 JST Tuesday (0320 GMT Tuesday/2320 EDT Monday), the BOJ’s nine-member board decided 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 also confirmed its overshooting commitment, saying, “It will 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.”
“The bank will continue to maintain stability of financing, mainly of firms, and financial markets, and will not hesitate to take additional easing measures, if necessary,” it concluded.
No Change to ETF, J-REIT Purchases
The BOJ board decided unanimously to leave the main asset purchase guidelines unchanged. Its dominant presence in the domestic stock markets has supported overall sentiment.
“The bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) as necessary with upper limits of about 12 trillion yen and about 180 billion yen, respectively, on annual paces of increase in their amounts outstanding,” the BOJ said.
The bank will maintain the amount of outstanding of CP (commercial paper) at about 2 million yen. It will purchase corporate bonds at about the same pace as prior to the pandemic, so that their amounts outstanding will gradually return to pre-pandemic levels of about 3 trillion yen. “In adjusting the amount outstanding of corporate bonds, the bank will give due consideration to their issuance conditions,” it said, repeating its latest stance.