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Japan Monetary Policy December 2022

Japan: BoJ unexpectedly changes yield curve control policy, sending shockwaves through financial markets

At its meeting ending on 20 December, as expected, 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%. Less expectedly, the BoJ widened the band around the bond yield target from plus/minus 0.25 percentage points to plus/minus 0.50 percentage points. The decision sent shockwaves throughout financial markets at home and abroad. The yen appreciated nearly 4% against the dollar; yields on Japanese, German and U.S. 10-year bonds rose; and stock markets fell.

The decision was unexpected as Governor Haruhiko Kuroda has stressed in recent months that the current spate of above-target inflation has been driven by cost-push factors which are likely to dissipate in the medium run, with no monetary policy response thus required. Kuroda stated that the December move was to iron out distortions in the yield curve, rather than marking a pivot away from the BoJs ultra-easy monetary policy. However, even after the widening of the trading band, the yield curve control policy will continue to distort the bond market. The move may instead be designed to test market reaction to a change in monetary policy as a prelude to an eventual exit from ultra-easy interest rates.

The BoJs 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 current above-target inflation expected to peter out next year as cost-push price pressures ease.

INGs Min Joo Kang said:

“Despite the denials, we think Governor Kuroda is trying to pave the way for policy normalisation before stepping down. A policy shift immediately after the leadership change is difficult and could miss the opportune time to end the decades-long ultra-low policy. He may be right that monetary policy should remain accommodative until a stable 2% inflation target is met and that the policy review is not needed in the short term. But, with today’s tweak, his successor will have more flexibility to deploy monetary policy in the future.”

The next monetary policy meeting is set to take place on 17–18 January.

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