The Bank of Japan (BOJ) left its ultra-loose monetary policy untouched following its two-day policy meeting that concluded on January 23rd, 2024. However, under new governor Kazuo Ueda, the central bank dropped a reference on keeping interest rates at “present or lower” levels, signaling that it is moving towards eventual policy normalization after years of heavy stimulus.
BOJ Leaves Short-Term Rate Target at -0.1%
The BOJ maintained its short-term interest rate target at -0.1% and its pledge to guide 10-year Japanese government bond (JGB) yields around 0% under its yield curve control policy. The decision was widely expected by economists and seen as a holding move until more clarity on wages and prices emerge .
However, the BOJ’s statement removed language on keeping rates at “present or lower” levels, suggesting the central bank is shifting towards policy normalization down the road after defending its stimulus program over the past year .
|BOJ Policy Decision
|Short-Term Rate Target
|10-Year JGB Yield Target
|Dropped “present or lower” rate reference
Upgraded Economic Forecasts Reflect Improved Outlook
In updated quarterly forecasts, the BOJ upgraded its growth projections and cut its inflation outlook slightly for the next fiscal year .
- Raised FY2023 growth forecast to 1.9% from 1.7%
- Lowered FY2024 core CPI forecast to 1.6% from 1.7%
The tweaks indicate the economy continues to recover on the whole, though inflation is proving sticker than expected. The forecasts reinforce market expectations that the BOJ will stand pat on policy for now, but keep the door open to adjustments later this year.
Yen and JGB Yields See Limited Reaction
The Japanese yen and JGB yields saw muted moves following the widely expected decision to keep ultra-loose policy in place. The lack of surprise also capped larger market reactions .
- USD/JPY little changed around 129.80
- 10-year JGB yield flat around 0.50%
Market participants awaited BOJ Governor Kazuo Ueda’s first post-meeting press conference for additional clues on the policy outlook. Many hope Ueda will address the feasibility of tweaking yield curve control to allow 10-year yields to trade in a wider band.
Focus Turns to BOJ Head Ueda’s Press Conference
Attention now turns to BOJ Governor Kazuo Ueda’s press conference at 3:30pm Tokyo time, his first since taking helm of the central bank this month . Investors will parse Ueda’s remarks for any change in forward guidance that could pave the way for an eventual shift in policy.
Key points of focus include :
- Whether Ueda will elaborate on dropping “present or lower” rate language
- If Ueda specifies any preconditions to tweak policy
- Views on expanding 10-year yield fluctuation band under yield curve control
- Assessments of wage growth outlook
Ueda has a tough balancing act in responding to government pressure for policy normalization without derailing Japan’s still-fragile economic recovery. Most economists expect the BOJ to hold off on any major pivots until later this year.
Policy Normalization Still a Long Way Off
Despite hints at a policy shift, analysts stress actual steps towards policy normalization remain far on the horizon . Intense government pressure makes some adjustment this year likely, but the timing and extent remain highly uncertain.
MUFG Bank summarizes key takeaways from the meeting :
- Reinforces no hurry to normalize policy
- New forecasts validate ultra-loose stance for now
- Language tweak keeps options open for adjustments
Overall, Ueda appears to be steering a very gradual course shift for the BOJ. Barring an unexpected escalation of inflation or surge in wage growth, major policy moves are unlikely until mid-2024 at the earliest.
Stocks Seen Weathering Modest BOJ Shift
While speculation of BOJ policy tweaks has pressured Japanese stocks recently, analysts say equities can stomach moderate yield curve control adjustments .
Nomura strategist Junichi Inoue states :
“Japanese stocks have already prices in the risks of a tweak in the BOJ’s yield curve control. Stocks should be able to weather a small increase in long-term interest rates.”
Allowing the 10-year yield trading range to widen slightly would only bring JGB yields closer to levels justified by fundamentals. As such, it should have limited impact and may even boost financial sector shares.
More aggressive tightening remains improbable this year unless inflation unexpectedly takes off. But corporate earnings growth faces challenges from global recession worries, China’s shaky recovery, and the drag from a stronger yen.
Looking Ahead: All Eyes on April
BOJ watchers widely see the April policy meeting as a crucial juncture where some policy shifts could emerge .
The meeting will bring updated quarterly forecasts and be followed closely for any changes in language or forward guidance. Economic projections may also strengthen the case for tweaks if inflation firms further or wage growth surprises to the upside.
In the meantime, markets brace for ongoing volatility in Japanese assets. While yields and the yen could see some relief rallies on Ueda’s gradualist stance, political pressure looms in the background. Investors face a balancing act pricing in both normalization hopes and Japan’s economic fragilities.
In its first policy decision under new leadership, the Bank of Japan affirmed its commitment to ultra-loose monetary policy for the time being. But subtle messaging changes and upgraded economic forecasts reinforce the central bank is inching towards eventual tightening, likely beginning later this year. Governor Ueda faces immense pressure in steering any shift amid both stubborn inflation and lingering growth headwinds. For now, the BOJ appears content to stand pat, but all eyes turn to the April meeting for clearer signs of concrete policy pivots.
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