BOJ leaning towards keeping yield control steady next week – sources

BOJ leaning towards keeping yield control steady next week – sources

The Bank of Japan is likely to maintain its yield control policy at its upcoming meeting, according to five sources familiar with the matter. Policymakers prefer to wait for more data to ensure that wages and inflation continue to rise. However, there is no consensus within the central bank on when to start phasing out stimulus, making the decision a close call.

Speculation has been brewing in the markets that the Bank of Japan could make adjustments to its yield curve control (YCC) as early as the July 27-28 meeting, as inflation has exceeded the bank’s target for over a year. Some market players believe that widening the allowance band around the yield target could address market distortions caused by the bank’s bond buying. However, many BOJ policymakers see no immediate need to take further action against the side-effects of YCC, as the 10-year yield remains stable below the 0.5% cap.

BOJ policymakers believe that they can afford to wait for more clarity on the global economy and Japanese firms’ profitability before making any changes to the policy framework. They expect to see if the economy can avoid a hard landing and if firms can continue to increase wages next year. Despite potential volatility in the bond and yen markets, the BOJ is expected to make no changes to its policy next week.

One source emphasized that while inflation is accelerating more than expected, the sustainability of this increase depends on corporate profits and next year’s wage outlook. Another source stated that while YCC will eventually need to end, now is not the right time as the change in Japan’s deflationary mindset is still sentiment-driven rather than substantial. A third source suggested that even if adjustments were made, they would likely be minor fine-tuning to ensure the sustainability of YCC.

In the upcoming quarterly projections, the BOJ is expected to revise up its core consumer inflation forecast for the current fiscal year. However, the forecasts for fiscal 2024 and 2025 are likely to remain largely unchanged. The BOJ’s current projections anticipate core consumer inflation to reach 1.8% this fiscal year, accelerate to 2.0% next year, and then slow to 1.6% in 2025. Core-core inflation, which excludes volatile fresh food and energy, is expected to be 2.5% this year, 1.7% the following year, and 1.8% in 2025.

Under the YCC framework, the BOJ guides short-term interest rates at -0.1% and the 10-year bond yield around 0% to stimulate growth and achieve its 2% inflation target. The bank also sets an allowance band around the 10-year yield target to address market distortions. The decision to make adjustments to the yield band will depend on the balance between the benefits and costs of YCC.

Market expectations regarding a potential tweak to YCC have fluctuated. BOJ Deputy Governor Shinichi Uchida’s remarks earlier this month about being mindful of the policy’s side-effects led some market players to speculate that the 0.5% ceiling for the 10-year bond yield could be raised. However, Governor Kazuo Ueda’s recent comments suggesting a high threshold for dialing back stimulus dampened expectations for a July tweak.

Economists polled by RushHourDaily expect the BOJ to keep its policy steady, including the yield control scheme, at the upcoming meeting. Regardless of whether adjustments are made to YCC, a broader increase in rates is not expected in the near future.

About News Team

Hi, I'm Alex Perez, an experienced writer with a focus on lifestyle and culture news. From food and fashion to travel and entertainment, I love exploring the latest trends and sharing my insights with readers. I also have a strong interest in world news and business, and enjoy covering breaking stories and events.

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