The BoJ will conduct YCC policy with greater flexibility
Despite today’s (28th July) surprise tweak to YCC policy, we continue to believe that Governor Ueda is determined to avoid premature tightening and will spend another year or so to carefully assess whether the economy is on track to achieve 2% inflation within his five-year term.
What you will learn:
- Their aim is to enhance the sustainability of the current easing framework in a forward-looking manner. Highlighting “extremely high uncertainties” in the inflation outlook, the BoJ argues that strictly capping yields will hamper bond market functioning and increase market volatility when upside risks materialize.
- The median core-core CPI (excluding fresh food and energy) forecast in the BoJ’s Quarterly Outlook Report was revised up to 3.2% from 2.5% for FY2023. However, it remained short of the 2% target in FY2024 and FY2025 at 1.7% and 1.8%, respectively. The central bank’s risk assessment of the inflation forecast for FY2023 and FY2024 is now skewed to the upside.
- We are confident in our forecast that inflation will moderate over H2 2023 because import costs have been trending down since mid-2022. Core-core CPI appears to be gradually losing inflation momentum recently, based on three-month rates rather than the year-on-year measure.
Wage rises in 2024 look set to be as high as this year in Japan
More market participants appear to have become confident that the wage-driven inflation is real, which will encourage the Bank of Japan to start normalizing its super-accommodative monetary policy in 2024. We revised up our projection for the spring wage settlement in 2024 to match the strength of the settlement in 2023. We believe that wage increase will continue after 2025, but achieving wage-led 2% inflation is still a long way off.Find Out More
Three key idiosyncrasies in Asian trade and why they matter
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BoJ to allow 10-year JGB yields to exceed 1%
The Bank of Japan (BoJ) left short- and long-term policy rates unchanged at -0.1% and around 0%, respectively, at the meeting on Oct.31. However, the BoJ decided to tweak the yield curve control (YCC) policy by setting the upper bound of 1% as a reference and by making its Japanese Government Bond (JGB) purchase operations more flexible not to rigidly defend the bound.Find Out More