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Japan Monetary Policy October 2022

Japan: BoJ keeps rates unchanged in October

At its meeting ending on 28 October, the Bank of Japan (BoJ) kept its policy rate unchanged at minus 0.10% and left its 10-year government bond yield target at 0.00%, as had been widely expected by the market. In order to reach the latter target, the BoJ committed to purchasing an unlimited number of government bonds as part of its “yield curve control” (YCC) policy.

The BoJs decision was driven by medium-run inflation forecasts remaining below target. In its latest forecasts, published with the monetary policy decision, the BoJ sharply raised its inflation forecasts for FY 2022 (April 2022—March 2023) to 2.9% (July forecasts: 2.3%). However, inflation is expected to fall back below the BoJs target in FY 2023, at 1.6% (July report: 1.4%). Prospects for sustained demand-pull inflation remain remote amid subdued wage growth and a darkening economic outlook—the BoJ downgraded its GDP growth forecasts for both FY 2022 and FY 2023.

The BoJs dovish forward guidance was little changed from the prior month. Despite growing pressure on the BoJ to change tack in the face of the recent weakening of the yen, 22 of our 27 panelists expect the BoJ to keep interest rates unchanged through end-2023. The yen has remained below JPY 150 per USD since the BoJs decision was announced. The BoJs trillion-plus dollar war chest is likely to deter speculative moves against the JPY ahead, giving the Central Bank time to wait out the end of the U.S. Feds hiking cycle in Q1 2023.

Analysts at Nomura commented on the policy outlook:

“We maintain our view that the BOJ is likely to keep YCC in place throughout 2023. Whether YCC is revised, on the other hand, does not appear to be a matter of timing, based on any particular schedule. The key here is the pace of wage increases. Yearly data from the past 30 years imply that a 2% rise in inflation tends to correspond to a 4–5% wage hike in the spring wage negotiations (including regular pay raises). […] It would seem reasonable to expect that the BOJ will move to revise YCC if and when spring wage negotiations result in wage hikes around 3.5–4.5%. We do not expect this until 2024 or later.”

The next monetary policy meeting is set to take place on 19–20 December.

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