Mount Fuji, Japan

Japan Monetary Policy January 2023

Japan: BoJ makes no further changes to yield curve control policy in January

At its meeting ending on 18 January, the Bank of Japan (BoJ) made no changes to its key policy rate (-0.10%), nor to its yield curve control (YCC) policy, with the 10-year government bond yield target remaining at 0.00% with a tolerance band of -0.50–0.50%. January’s decision, which was expected, followed the tweaks made to the yield curve control policy in December when the tolerance band was widened by 0.25 percentage points.

Preceding the decision, market speculation grew that the BoJ would modify or remove YCC. On 17 January, interest rate swaps at a 10-year maturity traded at 1.00%, 0.50 percentage points above the tolerance band.

The BoJ likely decided to keep YCC unchanged to avoid being seen as capitulating to market pressure. The architect of YCC—Governor Haruhiko Kuroda—is stepping down in April; it appears unlikely that the BoJ would want to alter YCC and adopt a new monetary policy strategy at least until near the end of Kuroda’s term.

Instead, the BoJ announced that it would offer commercial banks loans with interest rates determined on an ad-hoc basis. Until now, these central bank loans have had a zero-interest rate. The BoJ’s move will allow it to target certain portions of the yield curve to iron out distortions, boosting the sustainability of the YCC policy.

The BoJ’s dovish forward guidance was unchanged from the prior meeting. 27 of our 30 panelists expect the BoJ to keep interest rates unchanged through end-2023, with currently above-target inflation expected to retreat next year as cost-push price pressures ease.

Meanwhile, a majority of our panelists expect the yield on 10-year government bonds to end 2023 below the upper limit of the tolerance band. However, some panelists expect the yield to rise above the upper limit by the end of 2023. Given the current dysfunction of the bond market, it appears increasingly likely that the accession of a new governor in April will bring an alteration or abandonment of YCC.

Analysts at ING noted market doubts regarding the sustainability of YCC:

“Even after the BoJ’s failure to lift the YCC cap on 10Y JGB yields once more after its December move, it seems the widely held view in the market is that that cap will have to be lifted, or removed altogether, at some point this year. Even after today’s drop, 10Y JPY swaps still trade around 0.80%, well above the JGB cap, and we expect them to return to the 1% area soon. Trading JGBs has become a risky endeavour with shorts prohibitively expensive and longs liable to get run over by another surprise move by the BoJ.”

Analysts at Nomura drew another conclusion:

“We think the January Monetary Policy Meeting showed the BOJ’s commitment to YCC. Based on this, we retain our outlook for monetary policy. This means: (1) no end to the 10-year JGB target yield (currently around 0%) or negative interest rates (currently -0.1%) until at least the start of 2024; (2) the BOJ maintaining its permissible range for the 10-year JGB yield of ±0.5%; (3) a change in the forward guidance for monetary policy from mid-2023; and (4) the scrapping of YCC and a shift to controlling short-term market rates from 2024.”

The next monetary policy meeting is set to take place on 9–10 March.

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