Despite the more hawkish shifts of the other major central banks over the past week or so, the BoJ Policy Board decided today to keep its main monetary policy parameters unchanged. In particular:
- The negative policy rate of -0.1% was left in place, as was the target range for 10Y JGB yields of +/-0.25%.
- The BoJ also left its forward guidance unchanged, stating that it will continue with yield curve control for as long as necessary to achieve its inflation target in a stable manner.
- It repeated that it will not hesitate to take additional easing measures if necessary, and that it expects short- and long-term policy interest rates to remain at their present or lower levels.
- To defend its yield curve control targets, it also continued to commit to hold daily unlimited fixed-rate purchase operations of 10Y JGBs unless it’s highly unlikely that there will be no bids.
Recognition of recent market trends and strains
While the BoJ left its main policy parameters unchanged, it did not ignore entirely recent market developments. In particular:
- It stated that it would “pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices” suggesting a willingness to support the yen if necessary.
- To ease liquidity strains, it also relaxed the terms and conditions of its Securities Lending Facility for cheapest-to-deliver issues.
No hints of possible changes to the policy framework over the near term
Notably, there were no hints in the policy statement or Kuroda’s press conference that the BoJ intends to change policy direction anytime soon. For example, some observers had expected that the BoJ might launch a review of the current monetary framework, with similar reviews in the past having foreshadowed subsequent policy shifts. But there was no mention of such plans in the statement, and in his post-meeting press conference Kuroda repeated that he had no intention of changing policy or conducting such a review. And he repeated much of his recent mantra in defence of the current policy stance. Among other things, he insisted that the current cost-push inflation is negative for Japan’s economy, particularly as it is still trying to recover from the Covid shock. He insisted that monetary tightening could cause negative GDP growth, and so he was not considering widening the 10Y yield target range. He also argued that the BoJ had no difficulty implementing successfully its yield curve control policy.
Our baseline forecast still expects no change to BoJ policy before Kuroda retires
Kuroda is clearly still mindful that Japan’s inflation is very different to that of the other major economies, and that inflation over the coming two-to-three years is more likely to undershoot rather than overshoot the BoJ’s target. Moreover, he will also be wary that the current hawkish shift of the other major central banks – particularly the Fed – will push the US and global economy into recession next year. If so, Japan would not avoid a similar fate. So, assuming the BoJ can continue to address market pressures, Kuroda will have no intention of changing policy yet. Our colleagues in Tokyo continue to expect no change to BoJ monetary policy before Kuroda retires next spring. After that that a widening of the 10Y yield target range and increase in the negative policy rate to zero percent might possibly be in the offing, but only if Japan and the global economy can avoid recession then.