Mount Fuji, Japan

Japan Monetary Policy October 2023

Japan: BOJ disappoints investors after minor YCC tweak in October

At its 30–31 October meeting, the Bank of Japan (BOJ) loosened its control over the bond market, stating that its 1.00% cap on 10-year government debt yields—a policy known as yield curve control—was now a “reference”, rather than a hard limit. Meanwhile, the BOJ’s policy rate was left unchanged at -0.10%. The monetary policy decision was more dovish than hoped by investors, with a currency selloff after the meeting leading the yen to depreciate to below JPY 150 per USD.

The decision to make only a slight change was driven by the BOJ’s inflation forecasts. Despite being raised, the projections continue to suggest that inflation will fall below the BOJ’s 2.0% target in the medium term. The BOJ is likely favoring a wait-and-see attitude, with the results of wage negotiations in spring in particular focus; those taking place last year led to the largest salary hike since 1993.

Looking ahead, all but 2 of the 27 panelists polled by FocusEconomics expect the BOJ to leave its policy rate stable through to the end of 2023, with most then expecting policy easing in late 2024. Yield curve control is likely to be tinkered with sooner, but the effect of any such change is unlikely to be significant; our panelists expect the yield on 10-year bonds to remain below the 1.00% ceiling in the near term. A key factor to watch will be the spring wage negotiations, as well as commodity prices in light of the El Niño weather phenomenon and the Hamas-Israel war.

The Bank’s next meeting is scheduled for 18–19 December.

Analysts at Goldman Sachs said:

“We continue to expect the BOJ’s next move to be most likely in April 2024. If the current wage growth feeds into sustained inflation especially in service prices, leading to another round of solid wage agreement at the next year’s Shunto spring wage negotiation, then the Japanese economy will likely make a good step forward towards the virtuous cycle between wages and prices.”

Meanwhile, analysts at Nomura said:

“We retain our main scenario for monetary policy (on which we place a 60% probability). This scenario pictures YCC being scrapped in Oct–Dec 2024, and the negative interest rate policy (NIRP) not being scrapped until 2025 at the earliest.”

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