- The Bank of Japan will announce its July monetary policy decision early next week — markets think a change in policy settings is coming.
- Economists at Nomura think the BoJ is unlikely to make any major changes to policy due to a variety of factors, including still-tepid inflationary pressures.
- It says that when policy is tweaked — likely later in the year — the biggest challenge facing policymakers is how to convince markets that it does not imply the start of a normalisation in policy settings.
The eyes of the financial world are now back on Japan, specifically policymakers at the Bank of Japan (BoJ).
Benchmark 10-year Japanese government bond yields are rising, lifting to the highest level since early February on Monday, as speculation over a potential tweak to the BoJ’s massive bond-buying program at its meeting next week has intensified.
Despite BoJ Governor Kuroda pushing back against the speculation, telling reporters on the sideline of the G20 Finance Ministers meeting in Buenos Aires that he knew “absolutely nothing about the basis for [the Reuters] report”, markets clearly think that a change in policy direction is coming.
Indeed, given Japanese bond yields haven’t retraced Monday’s move — even with Kuroda’s push-back and attempts from the BoJ to limit the rise in yields — the only question markets appear to be pondering is not whether a change is coming but rather how significant it will be.
Takashi Miwa, Chief Japan Economist at Nomura, thinks its unlikely to produce market fireworks.
“We think the BoJ is unlikely to make any major changes to policy at the July meeting is that the analysis of factors behind weak inflation and the price outlook — the primary focus of discussion at the meeting — appear likely to be revised downward,” he says.
“We also see considerations that could make it politically difficult for the BoJ to change policy ahead of the Liberal Democratic Party (LDP) leadership election in September.”
Miwa says with inflation remaining persistently below the BoJ’s target — up just 0.2% in the year to June excluding fresh food and energy prices, below the 2% level targeted — it means the bank no choice but to prolong its current accommodative policy regime, albeit with increased flexibility.
“If the BoJ is able to come up with a new policy framework that maintains the easing effect of the current policies while addressing the side effects on financial institution earnings, we think it could officially adopt a more flexible policy framework as early as the October monetary policy meeting, after the LDP leadership election is over, when the BOJ is also scheduled to release its Financial System Report,” Miwa says.
So no change in the bank’s quantitative and qualitative easing (QQE) with yield curve control (YCC) program is likely next week in Miwa’s opinion, putting him at odds with views currently being expressed in markets.
However, he thinks a policy tweak is coming in the months ahead, creating a communications challenge for policymakers.
“We think it will be no easy task to formulate a policy regime that can alleviate the adverse impacts of current policy while maintaining its easing effects and avoiding giving markets the impression that it has begun to normalise or tighten monetary policy,” he says.
“One possible move would be to change its current YCC policy to purchase long-term Japanese government bonds (JGBs) to keep yields on 3-to 10-year JGBs around 0%, rather than targeting only 10-years as under the current policy.
“This could allow it to avoid any major change in 10-year yields while providing scope for a slight rise in rates on tenors of 5-years or less, which have a larger impact on financial institution earnings. “
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