| Consensus | Actual | Previous | |
|---|---|---|---|
| Change | 0bp | 0bp | 0bp |
| Level | -0.1% | -0.1% | -0.1% |
Highlights
The Bank of Japan voted unanimously, as expected, to maintain its seven-year-old yield curve control framework and retain its guidance that it will"patiently continue with monetary easing" in order to"achieve the price stability target of 2 percent in a sustainable and stable manner, accompanied by wage increases."
In a decade-long pursuit of stable 2 percent inflation, the board decided to keep the targets of minus 0.1 percent for the short-term policy rate and"around zero percent" for the 10-year bond yield, the latter of which has a flexible 1 percent upper limit after having been adjusted twice last year in the face of ripple effects from higher U.S. bond yields.
The market focus remains on when the central bank will end its negative interest rate policy introduced in January 2016. The BoJ charges 0.1 percent interest on a part of cash reserves parked at the bank by financial institutions, which is designed to encourage banks to lend more, but it is unpopular among lenders as it squeezes their profit margins.
BoJ policymakers are expected to maintain their easing stance at least until April, when they hope to see a clearer sign that wages will continue rising substantially. The results of annual wage negotiations between major firms and their trade unions won't be available until mid-March and indications of how that will influence smaller firms, which employ about 70 percent of the workforce, are likely to emerge after the April 1 start of fiscal 2024.
The move in October and July to make the long end of the yield curve control framework"more flexible," is regarded by some as a gradual step toward phasing out the framework and is seen by others as an effective end to the policy tool adopted in September 2016. The bank 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.
In its latest quarterly Outlook Report, the BOJ board maintained its forecast for inflation for the current fiscal year but lowered its projection for fiscal 2024 after jacking it up in October, as largely expected, in light of easing energy prices. It still sees inflation just below its 2 percent target in fiscal 2025.
"With regard to the risk balance, risks to both economic activity and prices are generally balanced," the bank said, indicating a more stable path, although noting"extremely high uncertainties" remain. In October, it said risks to economic activity were generally balanced for fiscal 2023 and 2024 but were skewed to the downside for fiscal 2025, and that risks to prices were skewed to the upside for fiscal 2023.
In a decade-long pursuit of stable 2 percent inflation, the board decided to keep the targets of minus 0.1 percent for the short-term policy rate and"around zero percent" for the 10-year bond yield, the latter of which has a flexible 1 percent upper limit after having been adjusted twice last year in the face of ripple effects from higher U.S. bond yields.
The market focus remains on when the central bank will end its negative interest rate policy introduced in January 2016. The BoJ charges 0.1 percent interest on a part of cash reserves parked at the bank by financial institutions, which is designed to encourage banks to lend more, but it is unpopular among lenders as it squeezes their profit margins.
BoJ policymakers are expected to maintain their easing stance at least until April, when they hope to see a clearer sign that wages will continue rising substantially. The results of annual wage negotiations between major firms and their trade unions won't be available until mid-March and indications of how that will influence smaller firms, which employ about 70 percent of the workforce, are likely to emerge after the April 1 start of fiscal 2024.
The move in October and July to make the long end of the yield curve control framework"more flexible," is regarded by some as a gradual step toward phasing out the framework and is seen by others as an effective end to the policy tool adopted in September 2016. The bank 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.
In its latest quarterly Outlook Report, the BOJ board maintained its forecast for inflation for the current fiscal year but lowered its projection for fiscal 2024 after jacking it up in October, as largely expected, in light of easing energy prices. It still sees inflation just below its 2 percent target in fiscal 2025.
"With regard to the risk balance, risks to both economic activity and prices are generally balanced," the bank said, indicating a more stable path, although noting"extremely high uncertainties" remain. In October, it said risks to economic activity were generally balanced for fiscal 2023 and 2024 but were skewed to the downside for fiscal 2025, and that risks to prices were skewed to the upside for fiscal 2023.
Market Consensus Before Announcement
The Bank of Japan board is widely expected to retain its guidance in a unanimous vote that it will"patiently continue with monetary easing" in order to"achieve the price stability target of 2 percent in a sustainable and stable manner, accompanied by wage increases." To this effect, it is likely to keep the targets of minus 0.1 percent for the short-term policy rate and"around zero percent" for the 10-year bond yield for now.
Market expectations for a policy change in January or March have receded in light of the magnitude 7.6 earthquake on Jan. 1 that killed more than 230 people and caused damage to nearly 29,000 homes in Ishikawa Prefecture along the Japan Sea coast, leaving over 15,000 people still in evacuation. Official remarks have also led to the conviction that the BoJ board will take a cautious approach to confirming the emergence of a positive cycle between wage hikes and gradual 2 percent inflation.
In his first interview with news media since he took office last April, Governor Kazuo Ueda told the public broadcaster NHK late last month that the possibility of lifting the negative interest rate in 2024, the bank's first rate hike since 2007,"is not zero." Ueda also said he wants to confirm two key factors before the board considers shifting the bank's policy stance: sustained wage growth and a continued rise in service prices, which may be seen by the bank's April 25-26 meeting.
The summary of the Dec. 18-19 meeting showed board members argued that they should wait until next spring (from March to May) to confirm whether annual labor talks would lead to a substantial wage hike for the second fiscal year in a row before considering lifting the negative short-term interest rate target or ending the yield curve control framework.
Governor Ueda told a post-meeting news conference on Dec. 19 that he believed the certainty of the board's outlook that the underlying inflation rate would increase gradually toward achieving the price stability through fiscal 2025"continues to rise gradually" but also said the board"still needs to closely monitor whether a virtuous cycle between wages and prices will intensify." Not much new information was likely to emerge before the January meeting, he added.
Market expectations for a policy change in January or March have receded in light of the magnitude 7.6 earthquake on Jan. 1 that killed more than 230 people and caused damage to nearly 29,000 homes in Ishikawa Prefecture along the Japan Sea coast, leaving over 15,000 people still in evacuation. Official remarks have also led to the conviction that the BoJ board will take a cautious approach to confirming the emergence of a positive cycle between wage hikes and gradual 2 percent inflation.
In his first interview with news media since he took office last April, Governor Kazuo Ueda told the public broadcaster NHK late last month that the possibility of lifting the negative interest rate in 2024, the bank's first rate hike since 2007,"is not zero." Ueda also said he wants to confirm two key factors before the board considers shifting the bank's policy stance: sustained wage growth and a continued rise in service prices, which may be seen by the bank's April 25-26 meeting.
The summary of the Dec. 18-19 meeting showed board members argued that they should wait until next spring (from March to May) to confirm whether annual labor talks would lead to a substantial wage hike for the second fiscal year in a row before considering lifting the negative short-term interest rate target or ending the yield curve control framework.
Governor Ueda told a post-meeting news conference on Dec. 19 that he believed the certainty of the board's outlook that the underlying inflation rate would increase gradually toward achieving the price stability through fiscal 2025"continues to rise gradually" but also said the board"still needs to closely monitor whether a virtuous cycle between wages and prices will intensify." Not much new information was likely to emerge before the January meeting, he added.
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.
