The Bank of Japan's expansionary and controlling stance, which caused the yen to drop to a 20-year low against the dollar, continues. With this perspective, the BOJ, which stands apart from other major central banks in the continuation of incentives, is not likely to make a policy change in the near future. On the other hand, current conditions and price evaluations are important, especially in terms of the latest situation of the yen.

 

Highlights from the BOJ statement;

 

(1) Yield curve control (8-1 majority vote)

a) The Bank has decided to determine the following guidance for market transactions for the interim period.

 

Short-term policy interest rate: The Bank will apply a negative interest rate of minus 0.1% to the Policy Interest Balances in the current accounts of financial institutions with the Bank.

Long-term interest rate: The bank will purchase the required amount of Japanese government bonds (JGB) without setting an upper limit to keep 10-year JGB yields around zero percent.

 

b) In applying the above guideline for market transactions within the scope of executing flat rate purchases for consecutive days, the Bank will purchase 10-year JGB at a rate of 0.25% each business day through flat rate purchases unless it is at a high rate.

 

·        The annual rate of increase in CPI (all items less fresh food) will be around 2% for now due to the increases in energy and food prices, but it is expected to slow down from now on. The annual rate of change in CPI (all items except fresh food and energy) is expected to increase moderately in positive territory, thanks to the improvement in the output gap and increases in medium and long-term inflation.

·        Regarding risks to the outlook, there are extremely high uncertainties for the Japanese economy, including the course and impact of COVID-19 at home and abroad, developments in the situation surrounding Ukraine, and commodity prices and developments in overseas economies.

 

The BOJ says the recovery still needs support, leaving less room to adjust its bond purchases. At the meeting in April, the central bank made a commitment to purchase 10-year JGB at a rate of 0.25% per business day for flat rate transactions with no cap if necessary. It looks like new operations will continue until at least 3Q22. Meanwhile, weakness in the yen raises the possibility of core inflation to hover around 2% through the end of 2022. The QE stance will also be maintained during this phase.

 

Yen versus 10-year JGB and UST yields… Source: Bloomberg

 

Current price increases are driven by higher import costs, energy and food prices rather than increased domestic demand. We see the BOJ determined to loosen even as other major central banks tighten. At the point of fine-tuning for prices, we see that the central bank has not changed the status quo as to which one to choose between the yield curve and the yen. The policy statement on the way to pay attention to the yen value and financial markets is a bit in the middle, we will look at the actions of the financial authority in this regard.

 

The control on the yield curve did not change and the threshold band was kept at 0.25%. We see that the status of JGB returns is around 0.25% band in 10 years as of now. While the Fed has increased interest rates so rapidly and other central banks are on their way to tightening, the prevention of the rise in bond yields and related purchases keeps the Bank of Japan on a loose monetary policy ground.

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