Bank of Japan is experiencing difficulties due to rising inflation
2023.01.12 04:05
Bank of Japan is experiencing difficulties due to rising inflation
By Kristina Sobol
Budrigannews.com – According to sources, the Bank of Japan (BOJ) will likely raise its inflation forecasts next week and discuss whether additional measures are required to address market distortions it sought to correct with a surprise change to its yield control policy in December.
The BOJ’s decision last month to widen the band surrounding its 10-year yield target has not eliminated market distortions brought on by its massive bond purchase, leaving traders speculating as to whether additional steps might be taken as soon as its rate review on January 17-18.
According to five sources who are familiar with the bank’s thinking, although the distortions may be one of the topics of discussion at the meeting on January 17-18, many BOJ officials would rather devote more time to examining the impact of the decision in December.
According to the sources, the central bank is also said to be holding off on making significant adjustments to yield curve control (YCC), such as abandoning negative interest rates, as it is eager to wait for more clarity on whether wage hikes will broaden.
One of the sources stated, “Japan has yet to see inflation stably and sustainably achieve the bank’s 2% target.”
Another source stated, “The key will be the outcome of spring wage negotiations, and whether wage hikes will continue as a trend,” regarding the date at which the BOJ might move further toward eliminating YCC.
The BOJ is likely to maintain its YCC targets of -0.1% for short-term interest rates and approximately 0% for the yield on 10-year bonds at its meeting next week.
The BOJ shocked markets last month by widening the band it sets around the 10-year yield target. The BOJ said this was done to reduce the rising cost of continued easing.
The 10-year yield can now rise as high as 0.5 percent within the newly established band, a level that the markets are currently testing. Governor Haruhiko Kuroda has refuted the notion that many market participants interpreted the decision in December as a sign of a forthcoming increase in interest rates.
According to sources who spoke with Reuters, the central bank is likely to increase its inflation forecasts in its upcoming quarterly forecasts, which will be released following the meeting. This is a sign of its growing conviction that the conditions could gradually fall in place to reduce stimulus.
Some analysts believe that the BOJ could further widen the band, allowing the 10-year yield to rise by as much as 0.75 percent, as a result of the rising pressure on long-term interest rates caused by rising inflation.
The Yomiuri newspaper in Japan reported that the BOJ may take additional measures next week to address the side effects of monetary easing. As a result, the yen increased and the 20-year Japanese government bond (JGB) yield increased to an eight-year high of 1.400% on Thursday.
According to the sources, however, there are a number of BOJ officials who are wary of widening the band because they are concerned that doing so would be interpreted as evidence that the central bank is losing control over the yield curve, casting doubt on the viability of YCC.
However, as dovish Governor Haruhiko Kuroda’s term comes to an end in April, some economists anticipate an end to YCC.
According to Yasuhide Yajima, chief economist at NLI Research Institute, “The BOJ will probably project inflation hitting 2% in fiscal 2023 at the meeting next week, so that it can justify tweaking YCC as early as April.”
“The BOJ could abandon the 10-year yield target later this year and commit to buying bonds flexibly to avert any abrupt spike in borrowing costs instead of widening the band again,”
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