Japan: Incoming Governor Ueda is entrusted to tweak the YCC
At Governor Kuroda’s final policy meeting, the Bank of Japan (BoJ) left short-term policy rates at -0.1% and long-term rates at around 0%. Despite mounting pressures on the 10-year JGB, the target range was kept at +/-0.50ppt.
While we did not discount the possibility of a widening of the band to secure a smooth leadership transition, Kuroda appears to have avoided a sharp rise in JGB yields before the end of the fiscal year. In particular, further losses in the domestic bond portfolio threaten the profitability of the already vulnerable regional banks.
What you will learn:
- The decision to uphold policy rates comes at a cost. The BoJ will be forced to continue its massive JGB purchases to stem speculation of additional YCC tweaks, which will worsen market liquidity.
- Higher inflation is fuelling upward pressure on yields. The mid-February Tokyo CPI offered little relief on core-goods price hikes. We expect core-goods inflation to stay elevated until Q2, before calming down as cost pressures abate.
- Under Kazuo Ueda’s leadership, we think the BoJ will tweak its current Yield Curve Control (YCC) policy in Q2 to let off market pressures and buy time for a review of the overall policy framework.
Japan’s structural labour shortage will drive wages higher
Japan's structural labour shortage has deepened. While it may not result in a wage-inflation spiral now, labour scarcity will put upward pressure on wages and inflation in the coming years.Find Out More
Asia Weekly Briefing: Lunar New Year adds noise and BNM likely to stay on hold
Aside from Malaysia's BNM meeting and a host of CPI data this week, the closely-watched "Two Sessions" political event will be held in China, trade data from China and Taiwan will be released, and Governor Haruhiko Kuroda will chair his last BoJ meeting.Find Out More
Next BoJ governor hints at a return to policy orthodoxy
We think the BoJ’s next governor, expected to be respected scholar Kazuo Ueda, will shift cautiously to a more orthodox policy framework centred on the control of the short-term policy rate. Although Ueda will likely maintain the zero-interest rate policy, we think he will also look to reduce the side-effects of some measures including the Yield Curve Control (YCC) policy.Find Out More