Japan: BoJ allows more flexibility to the YCC – UOB

The Bank of Japan (BOJ) in its scheduled Monetary Policy Meeting (MPM) on Fri (28 Jul), kept its key policy objectives unchanged to achieve the 2% inflation objective but tweaked the yield curve control (YCC) for “greater flexibility” and “to enhance the sustainability of monetary easing”. The YCC tweak means, that the +/-0.5% trading band of the 10-year JGB Yields will remain but they are no longer rigid limits, and the cap (“hard limit”) is now 1%, effectively widening the trading band to +/-100bps.  

The revisions in the latest Jul 2023 Outlook for economic activity and prices (The Bank’s View) were more about making material upward adjustments to the FY 2023 price forecasts while slightly lowering or maintaining the further out price forecasts which remained below the 2% objective. The BOJ made very little change to the GDP growth projections. 

BOJ Outlook – More Tweaks Before The Big Move In 2024? In an early Feb report, we had hypothesized a widening of the yield trading band to +/-100bps (by former BOJ Governor Kuroda in his last meeting in Mar before handing the reins to Ueda). Though it did not happen under Kuroda, the actions taken by Ueda (on 28 Jul) would in a way fulfill that trading band widening forecast. As such, we now expect Governor Ueda to carry out the path to normalisation/unwinding in two broad steps. 1) We expect a material period (Aug to Dec 2023)  of adjustment to its forward guidance on YCC and interest rates with possibility of further tweaks in the name of “greater flexibility” and “to enhance the sustainability of monetary easing”, to give market guidance and time to prepare for an orderly exit of BOJ’s ultra-easy monetary policy, and 2) we still expect monetary policy normalization to begin only in early 2024 - YCC to be dropped and negative policy call rate to rise from -0.1% to 0% in Jan 2024 MPM.