BoJ Preview: Banks see policy settings unchanged

When it comes to the BoJ, after three decades of unconventionally loose monetary policy, it will take time for the BoJ to be convinced that sustainable 2% inflation is in sight. Thus, we expect no news from this week’s meeting. But we still believe that normalization is in the cards, however, the risk is that it might not come until next year.

We expect the BoJ to keep the policy rate unchanged. At his first policy meeting in April, BoJ Governor Kazuo Ueda sent a dovish signal and said major policy changes are unlikely in the near term. Still, we think there are reasons for the central bank to make changes to its policy; Japan’s core CPI inflation has stayed above 3% since September 2022 and wage growth for 2023 may exceed 3%. Also, with Japan posting strong Q1 GDP growth, the central bank may shift focus to CPI (rather than just growth). We do not rule out YCC band widening at this meeting, although this is not our baseline scenario.

We expect the BoJ to tweak the YCC at one of the upcoming meetings. Widening of the yield curve control band to e.g. +/-100 bps can be explained as a move to improve market functioning, but will essentially be tightening. We still deem it most likely that the BoJ will stay put at the Friday meeting, though.

We expect BoJ to leave policy settings unchanged but think the prospects of a move in July to adjust the YCC band is much higher. BoJ also carries out its quarterly review in July, and it is likely that inflation forecasts are revised higher then. BoJ Governor Ueda has sounded cautious about a premature tightening of policy though this does not rule out a tweak in YCC.

The BoJ will likely apply a -0.1% rate to the policy rate balance in the current account. It will also probably purchase the necessary amount of JGBs without setting an upper limit so that the 10y JGB yield remains at around 0%. On the other hand, it will allow 10y JGB yields to fluctuate in the range of around plus and minus 1 percentage point from the target level.

We expect the BoJ to keep all its current policy settings unchanged. Likewise, a potential tweak in BoJ’s yield curve control policy is not likely to happen this month. However, should inflation remain at current levels in the second half of the year, we could still see a possible adjustment in the YCC policy over the next few months.

We don't expect changes to the current policy. Given there won't be an Outlook Report, we see the central bank as likely continuing to focus on downside inflation risks but emphasises that inflation and currency are among key catalysts for a policy change.

While we do not anticipate the BoJ to change monetary policy settings at its June meeting, we do forecast a shift later this year in October, when the global monetary policy and bond yield backdrop may allow for a smoother adjustment. We expect the BoJ's policy adjustment to be a further step toward normalizing Japan's government bond market. Specifically, we expect the BoJ to lift the target for the 10-year Japanese government bond yield to 0.25% from 0% and widen the tolerance band around that target to +/- 75 bps. Should this adjustment proceed smoothly, we would view it as a probable precursor to the BoJ fully ending yield curve control, perhaps sometime in 2024.

We expect the BoJ to leave its policy settings unchanged at its meeting this week. There is little incentive to change amid improved Japanese Government Bond (JGB) market functioning and soft wages growth. We maintain our view that the impetus to change the current policy stance of negative interest rates and yield curve control (YCC) will come from its negative side effects. We expect the BoJ to shorten the tenor of its target to 2y from 10y in coming meetings. The BoJ is likely to abandon YCC around the time it completes its comprehensive review of monetary policy.

We now expect the BoJ to keep all policy parameters, including YCC, unchanged and delay the decision to adjust YCC to July’s meeting.