Japan: BoJ “normalization” to start in a gradual fashion – UOB

Senior Economist at UOB Group Alvin Liew assesses the latest BoJ event.

Key Takeaways

“The Bank of Japan (BOJ) kept its policy measures unchanged at the Apr Monetary Policy Meeting (MPM) helmed by new BOJ Governor Ueda. The decision was unanimous, as the BOJ kept steadfastly to its easing stance but made adjustments to its forward guidance in the MPM statement via, 1) removal of the reference to Covid-19, and more importantly, 2) scrapping the forward guidance on interest rates. The BOJ also announced it will be conducting a broad perspective review of BOJ’s monetary policy which will take 1 to 1.5 years.”

“The revisions in the latest Apr 2023 Outlook for economic activity and prices (The Bank’s View) were more about trimming GDP growth further in FY2022 to FY2024 while making material upward adjustments to the price forecasts during the same period. According to BOJ, the growth downgrades in FY 2022 and FY2023 were due to weaker private consumption projections, while the upward inflation revisions for FY2023 and FY2024 were due to “higher projections for wages”. It is noted that FY2024 CPI inflation forecast was revised higher to 2.0% (from previous estimate of 1.8%), touching the BOJ price objective.”

“BOJ Outlook – Buying Time With Broad Policy Review, So No Change To Negative Rates & YCC In The Interim: While there were already various segments of the markets speculating that one of the first course of actions under Governor Ueda could be undertaking a policy review, the announcement of one that would span between 12 and 18 months still came as a surprise. With the policy review now in place, this has likely secured “policy inaction” in the interim. This also reinforces our belief that policy normalisation/unwinding under Governor Ueda will be carried out at a gradual, well-telegraphed pace, and not a sharp and sudden reversal. We had expected to see it in two broad steps, 1) protracted adjustment to its forward guidance on YCC and interest rates (Apr to Dec 2023) and 2) scrapping of YCC and lifting of the negative policy rate in early 2024. With the broad perspective policy review, there is now the possibility of an even longer runway (till Apr 2024) before any material policy unwinding will take place.”