BoJ Policy Decision: An important further step towards policy normalisation

31 October 2023

Chris Scicluna

As previewed by yesterday’s leak in the Nikkei (at 23.00 Tokyo time), the BoJ Policy Board today again adjusted its yield curve control framework.  In a further step towards policy normalisation, the BoJ:

(1) removed its previous commitment to “allow 10Y JGB yields to fluctuate in the range of around plus and minus 0.5% from the target level” of “around zero percent”, which had effectively been ignored in practice since it decided in late July to conduct YCC with greater flexibility;

(2) decided to “regard the upper bound of 1.0% for 10Y yields as a reference” in its purchase operations; and

(3) also decided no longer to offer fixed-rate purchase operations every day.

So, in effect, while the Board restated its intention to “control the yields mainly through large-scale JGB purchases and nimble market operations”, 1.0% should no longer be considered a firm ceiling to 10Y yields that will automatically and strictly be defended by fixed-rate purchase operations at that level.

Instead, the BoJ has signalled its intention to introduce greater flexibility in the determination of the yield curve, and in particular greater freedom for 10Y yields to respond to the market. Indeed, in his press conference, Ueda noted that the BoJ has now introduced greater ambiguity with respect to its intentions for yields.

The decision to adjust YCC today likely reflects several factors, including the recent significant further upwards shift in US yields, associated pressure on JGB yields, and, of course, the weakness of the yen exchange rate. But, importantly, the BoJ has also become more confident that it will achieve its inflation target, even though it judges that it still hasn’t quite attained that objective yet.

Indeed, it revised up its inflation projection across the horizon. Among other things, it now expects the core CPI measure excluding fresh food to be well above 2.0% this FY and next, before slipping back slightly to 1.7% in FY25. It also expects its preferred measure of core inflation (which excludes fresh food and energy) to be 1.9% in FY24 and FY25.

But while it stated that it expects that underlying CPI inflation will increase gradually toward achieving the 2% price stability target near the end of the projection horizon, it also emphasised that this needs to be accompanied by “an intensified virtuous cycle between wages and prices”.

So, the BoJ committed to continue with YCC and the negative rate until it has more confidence that has been achieved. And in his press conference, Ueda wouldn’t say whether YCC or the negative policy rate would be ended first.  Assuming no significant shocks and further progress in sustaining underlying inflation between now and the New Year, a further policy change, including perhaps an end to the negative rate which looks especially incongruous in the current global inflation environment, could be made at the January policy meeting. However, the BoJ is unlikely to be fully confident about the outlook for wages until April, when the annual spring pay round will be underway, and so the rate hike might still have to wait until then.

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