| Consensus | Actual | Previous | |
|---|---|---|---|
| Change | 0bp | 0bp | 0bp |
| Level | -0.1% | -0.1% | -0.1% |
Highlights
Key points from the Bank of Japan's latest policy decision:
--BoJ makes the 1 percent upper end of 10-year JGB yield a flexible 'reference,' not a definite line to defend, but keeps the official target at 'around zero'
--Board's vote on making the yield curve control more flexible is 8-to-1
--Board member Nakamura dissents again, arguing the bank should wait until it can confirm firm's earning power is up
--BoJ board keeps its basic easing stance unanimously to 'patiently' pursue stable 2 percent inflation
The Bank of Japan said Tuesday its policy board decided in a majority vote to make its seven-year-old yield curve control framework"more flexible" by calling its desired 1 percent upper end of the 10-year Japanese government bond (JGB) yield a"reference" instead of a definite line that the bank has been trying to defend with market operations.
At the same time, the BoJ board voted unanimously to maintain its basic monetary easing stance, keeping its long-term interest rate target officially"around zero percent" and the target for the overnight rate at minus 0.1 percent, with large asset purchases intact, in a decade-long campaign to achieve stable 2 percent inflation with sustainable wage growth.
The flexibility decision means the bank"will control the yields mainly through large-scale JGB purchases and nimble market operations." The visual image provided by the bank shows the 1 percent upper end is now a fine dotted line, instead of the bold red defense line that it had set in July to protect with massive fixed-rate bond buying operations.
Since then, the 10-year JGB yield has been pushed up by the spillover effect of a spike in the U.S. long-term bond yield that was triggered by the notion that the Federal Reserve will have to raise interest rates more to bring inflation back to target.
On Tuesday, the bank dropped its July decision to offer to buy 10-year Japanese government bonds at 1.0 percent every business day through fixed rate purchase operations unless it is highly likely that no bids will be submitted. This type of market operation"will have strong positive effects, but could also entail large side effects," the bank said.
Board member Toyoaki Nakamura, a former Hitachi executive with finance and accounting experience, dissented, although the bank said that he is"in favor of the idea of further increasing the flexibility."
Nakamura argued that it would be better to confirm that firms' earning power is rising in data, such as the Ministry of Finance's quarterly business survey, before allowing greater flexibility in the conduct of the bank's yield curve control.
He made the same argument about three months ago, when he was against the timing of the bank's first phase of making the yield curve control framework more flexible.
In July, the board decided in an eight to one vote to make the bank's reference range for the 10-year bond yield more flexible, basically keeping the range of minus 0.5 percent to plus 0.5 percent, but expanded its ultimate defense lines to minus 1.0 percent and plus 1.0 percent in market operations. The July vote on the overall easing stance was unanimous.
By providing"greater flexibility" to its market operations, the bank hopes to avoid being forced to abandon the yield curve control policy framework when long-term interest rates come under persistent upward pressures. It also hopes to allow a natural uptick in long-term interest rates that reflects economic recovery with substantial wage hikes and mitigate the negative impact of artificially suppressing interest rates, which has paralyzed bond market functions and could negatively affect other financial markets.
Patiently Pursuing Stable 2 Percent Inflation with Monetary Easing
The bank stressed that its accommodative monetary policy stance is necessary to complete its mission that began a decade ago.
"With extremely high uncertainties surrounding economies and financial markets at home and abroad, the bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions," it said."By doing so, it will aim to achieve the price stability target of 2 percent in a sustainable and stable manner, accompanied by wage increases."
This statement was first issued in April and has been repeated at every meeting since then. It indicates that the bank could adjust its yield curve control framework to allow slightly higher interest rates in a gradual shift toward an eventual exit from a decade of large-scale monetary easing.
BoJ See Modest Economic Recovery, 'Extremely High Uncertainties'
"Japan's economy is likely to continue recovering moderately for the time being, supported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies," the bank said in its quarterly Outlook Report for October, repeating the summary of its July report.
"Thereafter, as a virtuous cycle from income to spending gradually intensifies, Japan's economy is projected to continue growing at a pace above its potential growth rate," which is estimated to be zero to 0.5 percent, the bank said, repeating its July projection.
The BoJ revised up its inflation outlook, saying the year-over-year rate of increase in the core consumer price index (excluding fresh food) is likely to be above 2 percent through fiscal 2024 ending in March 2025,"mainly due to the remaining effects of a pass-through to consumer prices of cost increases led by the past rise in import prices and the effects of the recent rise in crude oil prices."
In fiscal 2025, the bank expects the cost pass-through impact to wane but toward the end of its projection period (through March 2026),"underlying CPI inflation is likely to increase gradually toward achieving the price stability target, as the output gap turns positive and as medium- to long-term inflation expectations and wage growth rise."
Looking ahead, the bank also repeated its recent assessment that"there are extremely high uncertainties" surrounding Japan's economy including developments in overseas economic activities and prices, commodity prices as well as domestic firms' wage- and price-setting behavior.
"Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices," the BoJ said. The yen remains relatively weak as the U.S. Federal Reserve has been fighting inflation with rate hikes while the BoJ has maintained monetary easing.
Board Still Sees Below 2 Percent Inflation, Slow 1 percent GDP Growth in Fiscal 2025
In the Outlook Report, the BoJ board revised up its forecast for inflation for the current fiscal year further and jacked up its projection for fiscal 2024. It still sees inflation below its 2 percent target in fiscal 2025.
"With regard to the risk balance, risks to economic activity are generally balanced for fiscal 2023 and 2024 but are skewed to the downside for fiscal 2025," the bank said. In July, it said the risks were skewed to the downside for fiscal 2023 but were generally balanced thereafter.
"Risks to prices are skewed to the upside for fiscal 2023," it said.
For fiscal 2023 ending in March 2024, the median forecast for the year-over-year increase in the core consumer price index (excluding fresh food) is 2.8 percent, up from 2.5 percent forecast in July. It will be lower than the 3.0 percent spike seen in fiscal 2022 but much higher than the 0.1 percent rise in fiscal 2021 and the 0.4 percent drop in fiscal 2020.
The board's inflation projection for fiscal 2024 is 2.8 percent, up sharply from 1.9 percent in July. Its forecast for 2025 is 1.7 percent, compared to 1.6 percent provided in July. This indicates that the banks' battle to reflate the economy will remain prolonged.
The spike in consumer inflation to above 4 percent at the start of the year is mostly due to elevated energy and commodities costs aggravated by the relatively weak yen. The core CPI eased to a 3.1 percent annual rate in February and March after surging to a 41-year high of 4.2 percent in January. Inflation fell to a 13-month low of 2.8 percent in September from 3.1 percent in August.
The board's median economic growth forecast for fiscal 2023 is 2.0 percent, revised up from 1.3 percent projected about three months ago. By contrast, its GDP forecast for fiscal 2024 is at 1.0 percent, revised down from 1.2 percent previously. The board expects the economy to grow at 1.0 percent in fiscal 2025, unchanged its July forecast of 1.0 percent.
Basic Easing Policy Stance in Place
At its two-day meeting that ended at 1220 JST Tuesday (0320 GMT Tuesday/2320 EDT Monday), the BoJ's nine-member board decided in a unanimous vote to maintain its overall monetary easing stance under the yield curve control framework that it adopted in September 2016, vowing to keep zero to negative interest rates"as long as necessary" to achieve its 2 percent inflation target in a stable manner.
Under the current framework, the BoJ is keeping the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent by buying"a necessary amount" of Japanese government bonds"without setting an upper limit," and to keep the overnight interest rate at minus 0.1 percent by charging 0.1 percent interest on a part of cash reserves parked at the bank by financial institutions.
The bank also confirmed its overshooting commitment, saying,"It will continue expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI, all items less fresh food) exceeds 2 percent and stays above the target in a stable manner."
"The bank will continue to maintain stability of financing, mainly of firms, and financial markets, and will not hesitate to take additional easing measures, if necessary," it concluded.
--BoJ makes the 1 percent upper end of 10-year JGB yield a flexible 'reference,' not a definite line to defend, but keeps the official target at 'around zero'
--Board's vote on making the yield curve control more flexible is 8-to-1
--Board member Nakamura dissents again, arguing the bank should wait until it can confirm firm's earning power is up
--BoJ board keeps its basic easing stance unanimously to 'patiently' pursue stable 2 percent inflation
The Bank of Japan said Tuesday its policy board decided in a majority vote to make its seven-year-old yield curve control framework"more flexible" by calling its desired 1 percent upper end of the 10-year Japanese government bond (JGB) yield a"reference" instead of a definite line that the bank has been trying to defend with market operations.
At the same time, the BoJ board voted unanimously to maintain its basic monetary easing stance, keeping its long-term interest rate target officially"around zero percent" and the target for the overnight rate at minus 0.1 percent, with large asset purchases intact, in a decade-long campaign to achieve stable 2 percent inflation with sustainable wage growth.
The flexibility decision means the bank"will control the yields mainly through large-scale JGB purchases and nimble market operations." The visual image provided by the bank shows the 1 percent upper end is now a fine dotted line, instead of the bold red defense line that it had set in July to protect with massive fixed-rate bond buying operations.
Since then, the 10-year JGB yield has been pushed up by the spillover effect of a spike in the U.S. long-term bond yield that was triggered by the notion that the Federal Reserve will have to raise interest rates more to bring inflation back to target.
On Tuesday, the bank dropped its July decision to offer to buy 10-year Japanese government bonds at 1.0 percent every business day through fixed rate purchase operations unless it is highly likely that no bids will be submitted. This type of market operation"will have strong positive effects, but could also entail large side effects," the bank said.
Board member Toyoaki Nakamura, a former Hitachi executive with finance and accounting experience, dissented, although the bank said that he is"in favor of the idea of further increasing the flexibility."
Nakamura argued that it would be better to confirm that firms' earning power is rising in data, such as the Ministry of Finance's quarterly business survey, before allowing greater flexibility in the conduct of the bank's yield curve control.
He made the same argument about three months ago, when he was against the timing of the bank's first phase of making the yield curve control framework more flexible.
In July, the board decided in an eight to one vote to make the bank's reference range for the 10-year bond yield more flexible, basically keeping the range of minus 0.5 percent to plus 0.5 percent, but expanded its ultimate defense lines to minus 1.0 percent and plus 1.0 percent in market operations. The July vote on the overall easing stance was unanimous.
By providing"greater flexibility" to its market operations, the bank hopes to avoid being forced to abandon the yield curve control policy framework when long-term interest rates come under persistent upward pressures. It also hopes to allow a natural uptick in long-term interest rates that reflects economic recovery with substantial wage hikes and mitigate the negative impact of artificially suppressing interest rates, which has paralyzed bond market functions and could negatively affect other financial markets.
Patiently Pursuing Stable 2 Percent Inflation with Monetary Easing
The bank stressed that its accommodative monetary policy stance is necessary to complete its mission that began a decade ago.
"With extremely high uncertainties surrounding economies and financial markets at home and abroad, the bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions," it said."By doing so, it will aim to achieve the price stability target of 2 percent in a sustainable and stable manner, accompanied by wage increases."
This statement was first issued in April and has been repeated at every meeting since then. It indicates that the bank could adjust its yield curve control framework to allow slightly higher interest rates in a gradual shift toward an eventual exit from a decade of large-scale monetary easing.
BoJ See Modest Economic Recovery, 'Extremely High Uncertainties'
"Japan's economy is likely to continue recovering moderately for the time being, supported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies," the bank said in its quarterly Outlook Report for October, repeating the summary of its July report.
"Thereafter, as a virtuous cycle from income to spending gradually intensifies, Japan's economy is projected to continue growing at a pace above its potential growth rate," which is estimated to be zero to 0.5 percent, the bank said, repeating its July projection.
The BoJ revised up its inflation outlook, saying the year-over-year rate of increase in the core consumer price index (excluding fresh food) is likely to be above 2 percent through fiscal 2024 ending in March 2025,"mainly due to the remaining effects of a pass-through to consumer prices of cost increases led by the past rise in import prices and the effects of the recent rise in crude oil prices."
In fiscal 2025, the bank expects the cost pass-through impact to wane but toward the end of its projection period (through March 2026),"underlying CPI inflation is likely to increase gradually toward achieving the price stability target, as the output gap turns positive and as medium- to long-term inflation expectations and wage growth rise."
Looking ahead, the bank also repeated its recent assessment that"there are extremely high uncertainties" surrounding Japan's economy including developments in overseas economic activities and prices, commodity prices as well as domestic firms' wage- and price-setting behavior.
"Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices," the BoJ said. The yen remains relatively weak as the U.S. Federal Reserve has been fighting inflation with rate hikes while the BoJ has maintained monetary easing.
Board Still Sees Below 2 Percent Inflation, Slow 1 percent GDP Growth in Fiscal 2025
In the Outlook Report, the BoJ board revised up its forecast for inflation for the current fiscal year further and jacked up its projection for fiscal 2024. It still sees inflation below its 2 percent target in fiscal 2025.
"With regard to the risk balance, risks to economic activity are generally balanced for fiscal 2023 and 2024 but are skewed to the downside for fiscal 2025," the bank said. In July, it said the risks were skewed to the downside for fiscal 2023 but were generally balanced thereafter.
"Risks to prices are skewed to the upside for fiscal 2023," it said.
For fiscal 2023 ending in March 2024, the median forecast for the year-over-year increase in the core consumer price index (excluding fresh food) is 2.8 percent, up from 2.5 percent forecast in July. It will be lower than the 3.0 percent spike seen in fiscal 2022 but much higher than the 0.1 percent rise in fiscal 2021 and the 0.4 percent drop in fiscal 2020.
The board's inflation projection for fiscal 2024 is 2.8 percent, up sharply from 1.9 percent in July. Its forecast for 2025 is 1.7 percent, compared to 1.6 percent provided in July. This indicates that the banks' battle to reflate the economy will remain prolonged.
The spike in consumer inflation to above 4 percent at the start of the year is mostly due to elevated energy and commodities costs aggravated by the relatively weak yen. The core CPI eased to a 3.1 percent annual rate in February and March after surging to a 41-year high of 4.2 percent in January. Inflation fell to a 13-month low of 2.8 percent in September from 3.1 percent in August.
The board's median economic growth forecast for fiscal 2023 is 2.0 percent, revised up from 1.3 percent projected about three months ago. By contrast, its GDP forecast for fiscal 2024 is at 1.0 percent, revised down from 1.2 percent previously. The board expects the economy to grow at 1.0 percent in fiscal 2025, unchanged its July forecast of 1.0 percent.
Basic Easing Policy Stance in Place
At its two-day meeting that ended at 1220 JST Tuesday (0320 GMT Tuesday/2320 EDT Monday), the BoJ's nine-member board decided in a unanimous vote to maintain its overall monetary easing stance under the yield curve control framework that it adopted in September 2016, vowing to keep zero to negative interest rates"as long as necessary" to achieve its 2 percent inflation target in a stable manner.
Under the current framework, the BoJ is keeping the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent by buying"a necessary amount" of Japanese government bonds"without setting an upper limit," and to keep the overnight interest rate at minus 0.1 percent by charging 0.1 percent interest on a part of cash reserves parked at the bank by financial institutions.
The bank also confirmed its overshooting commitment, saying,"It will continue expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI, all items less fresh food) exceeds 2 percent and stays above the target in a stable manner."
"The bank will continue to maintain stability of financing, mainly of firms, and financial markets, and will not hesitate to take additional easing measures, if necessary," it concluded.
Market Consensus Before Announcement
The Bank of Japan policy board is expected to decide unanimously to maintain its monetary easing stance, as it did in September, keeping its zero to slightly negative interest rate targets along the yield curve as well as large asset purchases to continue seeking stable 2 percent inflation and support sustainable wage growth.
The Nikkei newspaper reported late on Monday that the bank's policymakers are likely to consider making the yield curve control framework even more flexible at their meeting this week by allowing the 10-year bond yield to trade above 1 percent"to some extent," the upper end of its range expanded in July. The idea of conducting"flexible" market operations to buy 10-year Japanese government bonds at a fixed rate"has surfaced" at the bank, the Nikkei said.
In July, the board decided in an eight to one vote to make the bank's existing reference range for the 10-year bond yield more flexible, basically keeping the range of minus 0.5 percent to plus 0.5 percent, but expanded its ultimate defense lines to minus 1.0 percent and plus 1.0 percent in market operations. The July vote on the overall easing stance was unanimous.
Last month, the bank repeated its July decision that it will offer to buy 10-year Japanese government bonds at 1.0 percent every business day through fixed rate purchase operations unless it is highly likely that no bids will be submitted. Previously, the bank had been offering to buy long-term bonds at a fixed rate of 0.5 percent.
Governor Kazuo Ueda told a post-meeting news conference last month that the bank's policymakers"cannot possibly pre-determine the timing of policy change or specific responses," reminding that it may take some more time before clear indications for continued substantial wage hikes and stable 2 percent inflation emerge. He repeated that Japan's growth and inflation outlook remains highly uncertain.
Ueda also said the risk of under-easing is still greater than over-easing because Japan has experienced years of deflation and low inflation.
In the quarterly Outlook Report due after the Oct. 30-31 meeting, the BoJ board's median forecasts for the core CPI (excluding fresh food) for fiscal 2023 and 2024 are likely to be revised up but their projection for fiscal 2025 is expected to remain under the bank's 2 percent target.
The Nikkei newspaper reported late on Monday that the bank's policymakers are likely to consider making the yield curve control framework even more flexible at their meeting this week by allowing the 10-year bond yield to trade above 1 percent"to some extent," the upper end of its range expanded in July. The idea of conducting"flexible" market operations to buy 10-year Japanese government bonds at a fixed rate"has surfaced" at the bank, the Nikkei said.
In July, the board decided in an eight to one vote to make the bank's existing reference range for the 10-year bond yield more flexible, basically keeping the range of minus 0.5 percent to plus 0.5 percent, but expanded its ultimate defense lines to minus 1.0 percent and plus 1.0 percent in market operations. The July vote on the overall easing stance was unanimous.
Last month, the bank repeated its July decision that it will offer to buy 10-year Japanese government bonds at 1.0 percent every business day through fixed rate purchase operations unless it is highly likely that no bids will be submitted. Previously, the bank had been offering to buy long-term bonds at a fixed rate of 0.5 percent.
Governor Kazuo Ueda told a post-meeting news conference last month that the bank's policymakers"cannot possibly pre-determine the timing of policy change or specific responses," reminding that it may take some more time before clear indications for continued substantial wage hikes and stable 2 percent inflation emerge. He repeated that Japan's growth and inflation outlook remains highly uncertain.
Ueda also said the risk of under-easing is still greater than over-easing because Japan has experienced years of deflation and low inflation.
In the quarterly Outlook Report due after the Oct. 30-31 meeting, the BoJ board's median forecasts for the core CPI (excluding fresh food) for fiscal 2023 and 2024 are likely to be revised up but their projection for fiscal 2025 is expected to remain under the bank's 2 percent target.
Definition
The Bank of Japan is the central bank of Japan. The Bank of Japan Act states that the bank's monetary policy should be aimed at"achieving price stability, thereby contributing to the sound development of the national economy." The nine-member policy board reviews economic conditions at home and abroad before making a policy decision. There is no specific time for the announcement. The board holds eight two-day Monetary Policy Meetings a year, in January, March, April, June, July, September, October and December. At each meeting, the board votes on the proposals on the bank’s monetary policy stance and the basic guideline on how to achieve the policy target submitted by the chair of the board, who is the bank governor.
Description
The announcement of the bank’s monetary policy decision after each meeting can cause a market reaction, even when there is no change to the policy stance. Markets tend to look ahead toward a policy shift, pricing in a change to the bank’s targets for overnight and long-term interest rates, the pace of financial asset purchases or the scale of market operations.
Market participants closely monitor the news conference by the BoJ governor that usually starts at 1530 JST (0130 EST/0230 EDT/0630 GMT), a few hours after the bank releases its policy decision. Comments from the governor could provide clues to what the bank may or may not do in the near term, which in turn could trigger buying or selling of the yen against the dollar.
Since April 2023, the bank has been conducting a"broad-perspective review" of the costs and benefits of its various monetary easing measures implemented in the past 25 years. The negative overnight interest rate target introduced in January 2016 has been unpopular among lenders as it squeezes their profit margins.
Market participants closely monitor the news conference by the BoJ governor that usually starts at 1530 JST (0130 EST/0230 EDT/0630 GMT), a few hours after the bank releases its policy decision. Comments from the governor could provide clues to what the bank may or may not do in the near term, which in turn could trigger buying or selling of the yen against the dollar.
Since April 2023, the bank has been conducting a"broad-perspective review" of the costs and benefits of its various monetary easing measures implemented in the past 25 years. The negative overnight interest rate target introduced in January 2016 has been unpopular among lenders as it squeezes their profit margins.
