–BOJ Sees Current Spike in Core CPI to Ease Toward Mid-FY23 on Easing Effects of Energy, Food, Durable Goods Markups
By Max Sato
(MaceNews) – The Bank of Japan said Tuesday its policy board decided unanimously to allow the yield on the 10-year Japanese government bonds to rise to 0.5% from the current cap of 0.25% amid upward pressures arising from aggressive tightening by other major central banks, hoping to revive some of the paralyzed market functions under its yield curve control regime.
At the same time, the board voted unanimously to maintain its basic monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases to support economic recovery from the pandemic-triggered slump and anchor inflation around its 2% price stability target.
The board “decided to modify the conduct of yield curve control in order to improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions,” the bank said in its policy statement issued after a two-day meeting.
The BOJ noted that increased volatility in overseas financial and capital markets since U.S. and some other central banks launched tightening in March has led the functioning of Japanese bond markets to deteriorate, “particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrate relationships between spot and futures markets.”
“The bank expects that the measures decided today will facilitate the transmission of monetary easing effects generated under the framework of yield curve control, such as through corporate financing,” the BOJ said.
“Thereafter, it is projected to accelerate again moderately on the back of improvement in the output gap and rises in medium- to long-term inflation expectations and in wage growth,” it said.
The focus is on whether the board will maintain its medium-term outlook provided in October that downside risks to growth and upside risks to inflation are expected to last long, in its quarterly Outlook Report due after the next policy meeting on Jan. 17-18.
Governor Haruhiko Kuroda has repeatedly said the bank would not consider raising interest rates while inflation is not accompanied by solid wage growth (real wages are falling) and supply continues to exceed demand in the Japanese economy. The BOJ board continues to project inflation is unlikely to be anchored around its 2% price stability target at least for the next few years.
Consumer inflation in Japan soared in October as many more firms, hit by high producer and import costs, jacked up retail prices for food, beverages, electronic appliances, and tobacco, boosting the annual increase in the core CPI (excluding fresh food) to a more than 40-year high of 3.6%. The core measure is expected to post a nearly 41-year high of 3.8% in November CPI data due Friday. That would be still far below 6% in the U.S.
The difference between now and then is that the current spike in prices is mostly due to elevated energy and commodities costs aggravated by the weak yen, and that service prices remain nearly flat (up just 0.8% on year in October versus a 6.5% rise in goods prices), reflecting slow wage hikes. Unlike in the U.S., Japanese firms didn’t resort to massive layoffs at the start of the pandemic, and thus many sectors don’t need to offer much higher wages to secure necessary workers as the economy continues to reopen.
No Change to Anti-Covid Funding Programs
There is no change to the bank’s basic stance in indirectly supporting firms hit by the drag from the lingering global pandemic.
In September, the board decided to extend its fund provisions to lenders that make loans to smaller firms by another six months and finish the program at the end of March 2023, while also extending the period of its funding against loans that financial institutions make on the back of government support to mainly support small businesses by three months and complete it at the end of December 2022.
BOJ to Boost JGB Buying, Allow Wider 10-Year JGB Yield Moves
To keep speculative market forces from pushing the long-term bond yield beyond its defense line, the bank said it will “significantly increase” the amount of JGB purchases while seeking to make its market operations more flexible by expanding the range of 10-year JGB yield fluctuations from the target level (zero percent): from between around plus and minus 0.25 percentage points to between around plus and minus 0.5 points.
The BOJ will increase the amount of monthly JGB purchases to around Y9 trillion from Y7.3 trillion in the first quarter of 2023. “The purchase size per auction will be set in a flexible manner, taking account of market conditions,” it said.
The BOJ will offer to buy 10-year Japanese government bonds at a fixed rate of 0.5% (up from 0.25% now) every business day, “unless it is highly likely that no bids will be submitted.” The board decided to introduce this new type of market operation in April.
The bank has been guiding the 10-year JGB yield “around zero” to maximize the impact of monetary easing but it has allowed market rates to fluctuate between minus 0.25% to plus 0.25%.
The BOJ is keeping its stance of flexibly buying large amounts of Japanese government bonds, which is directly linked to its key policy tool of controlling long-term borrowing costs for businesses and households. But nearly a decade of massive cash injections into the financial system has failed to cause a substantial shift toward demand-based higher price settings and wage hikes.
The bank is also maintaining the pace of its purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs), which have supported domestic stock markets, and thus overall economic sentiment.
BOJ Continues to See Japan Economic Recovery Despite Headwinds
The BOJ more or less maintained its assessment of current conditions, saying, “Japan’s economy, despite being affected by factors such as high commodities prices, has picked up as the resumption of economic activity has progressed while public health has been protected from Covid-19.”
“Japan’s economy is likely to recover, with the impact of Covid-19 and supply-side constraints waning, although it is expected to be under downward pressure stemming from high commodities prices and slowdowns in overseas economies,” it said, repeating its latest view provided in October.
The bank also remains optimistic about the positive economic growth mechanism, repeating its October outlook: “Thereafter, as a virtuous cycle from income to spending intensifies gradually, Japan’s economy is projected to continue growing at a pace above its potential growth rate.” The BOJ estimates the rate to be in a range of zero to 0.5%.
Looking ahead, the bank repeated its recent risk assessment that “there remain extremely high uncertainties for Japan’s economy” including developments in overseas economic activities and prices, the Ukraine war, commodity prices and the pandemic.
“In this situation, 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 bank said.
The yen’s weakness this year has made already high import costs even higher but the currency has rebounded somewhat against the dollar in recent trading following massive yen-buying foreign exchange intervention by the Ministry of Finance and in light of market expectations that the Federal Reserve is slowing the pace of its tightening.
Easing Policy Stance Unchanged
At its two-day meeting that ended just before midday Tuesday (0300 GMT Friday/2200 EST 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.
“For the time being, while closely monitoring the impact of COVID-19, the bank will support financing, mainly of firms, and maintain stability in financial markets, and will not hesitate to take additional easing measures if necessary; it also expects short- and long-term policy interest rates to remain at their present or lower levels,” the bank said, repeating its recent statement.
The BOJ board decided unanimously to leave the main asset purchase guidelines unchanged, as seen in recent meetings.
“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. It will also purchase CP (commercial paper) and corporate bonds at about the same pace as prior to the pandemic, “so that their amounts outstanding will gradually return to pre-pandemic levels, namely, about 2 trillion yen for CP and about 3 trillion yen for corporate bonds.”
“In adjusting the amount outstanding of corporate bonds, the bank will give due consideration to their issuance conditions,” it added.