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Japan Monetary Policy July 2023

Japan: BOJ surprises markets by loosening cap on bond yields in July

At its 28 July meeting, the Bank of Japan (BOJ) kept its target for the 10-year government bond yield at 0.00% but announced that the tolerance band of minus 0.50–0.50% would no longer be binding. The BOJ also said that it would buy 10-year government bonds at 1.00% each day, effectively setting the upper limit on yields at that level. This change to the BOJ’s yield curve control policy caught markets off-guard, with the 10-year government bond yield surging to the highest level since 2014 after the decision was announced. Meanwhile, the BOJ left its key policy rate unchanged at -0.10%.

The change to yield curve control does not herald a shift by the BOJ to a more restrictive monetary policy. Rather, the change will make yield curve control more sustainable, allowing the Bank to keep it in place for longer. In order to maintain a cap on yields, the BOJ has been forced to purchase large quantities of government bonds and now owns more than 50% of government debt, disrupting the normal functioning of the bond market. By loosening the cap, more private investors will purchase government debt, improving liquidity.

Looking ahead, all but one of the 29 economists polled by FocusEconomics expect the BOJ to leave the policy rate unchanged this year, with most anticipating that it will only make changes in H2 2024. With regard to yield curve control, further changes are also unlikely this year.

In making its policy decision, the BOJ stated that it would continue with yield curve control until its medium-term inflation target of 2.0% is met. As the BOJ still sees inflation falling below 2.0% next year, according to its latest forecasts, it is therefore unlikely to remove yield curve control for the time being. A key factor to watch will be next spring’s annual wage negotiations—known as the shunto—which typically start in February or March. This year, the shunto resulted in the largest wage rise since 1993. Sustained wage growth will be key if the BOJ is to reach its 2.0% inflation target.

The Bank’s next meeting is scheduled for 21–22 September.

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