New BOJ chief’s first task may be to tweak forward guidance

By Leika Kihara

TOKYO (Reuters) – Japan’s new central bank chief is likely to keep monetary settings ultra-loose at his debut meeting on Friday, but may consider dropping references to the COVID-19 in forward guidance as the pandemic fades as an economic risk.

    While such a tweak would not have material implications for policy, investor may interpret it as Governor Kazuo Ueda’s first step towards a broader change to the central bank’s current dovish communication and an eventual phase-out of its massive stimulus.

Forward guidance, or a pledge central banks make on the future policy course, is likely a key tool for Ueda, who as a Bank of Japan (BOJ) board member invented the bank’s first such guidance in 1999 that promised to keep zero rates until deflation is overcome.

Enhancing the BOJ’s communication with markets may be the first task the former academic will work on in differentiating himself from his predecessor Haruhiko Kuroda, some analysts say.

With Japan having re-opened the economy and removed COVID-19 curbs, critics say the BOJ’s guidance to keep ultra-easy policy “with a close eye on the pandemic’s impact”, introduced in 2020, has become outdated.

At the two-day meeting ending on Friday, the BOJ board may debate tweaking the language to phase out reference on the COVID-19, though an actual tweak may be delayed until the next rate review in June, say sources familiar with its thinking.

“The reference on COVID would need to be modified, though the overall dovish message won’t change,” one of them said.

Given uncertainty over the global economy and domestic wage outlook, the BOJ is expected to maintain on Friday its yield curve control (YCC) targets, set at -0.1% for short-term rates and around zero for the 10-year bond yield.

Aside from the reference on COVID, the key will be how soon the BOJ could change a pledge to keep short- and long-term interest rates at “current or lower levels.” A shift to a less dovish bias could signal a near-term tweak to YCC, analysts say.

GUIDANCE QUESTIONS

Ueda left few clues on how soon the guidance could change, telling an inaugural news conference on April 10 that the board will “discuss all options at each of our policy meetings.”

Clues on the timing of a tweak to YCC may also come from the BOJ’s quarterly outlook report due on Friday, which will include fresh growth and price forecasts.

The BOJ is expected to revise up its core consumer inflation forecast for the current fiscal year ending in March 2024, but cut its economic growth estimate due to the fallout from slowing global growth, the sources said.

Under current projections made in January, the BOJ expects core consumer inflation to hit 1.6% this year and 1.8% in fiscal 2024. It expects the economy to expand 1.7% this fiscal year before slowing to 1.1% the following year.

The outlook for 2025, to be issued for the first time, will be much harder to predict and could be interpreted by markets as a signal on how soon the BOJ could phase out stimulus.

Many analysts expect the BOJ to project inflation to hover near, but stay slightly below, the bank’s 2% target for both fiscal 2024 and 2025.

Ueda is expected to hold a news conference after the policy meeting on Friday to explain the bank’s decision.

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