Bank of Japan Holds, Yen Weakens

The most anticipated Bank of Japan meeting in years ended with policy unchanged. Those expecting the fireworks that the end of yield curve control would bring were sorely disappointed, and the recent yen strength was quickly unwound.

That short bout of weakness didn’t last though. Roughly half of the move in USDJPY was retraced by 9AM UK time:

Heading into the meeting, the prevailing narrative was one of caution. Governor Kuroda is nearing the end of his term, and the recent move to widen the yield control band (to 0.5% +/- either side of 0) was reported by the central bank as a technical adjustment to improve the functioning of bond markets.

Ever since, bond traders were shorting the bonds, pushing yields up against that 0.5% level, prompting the central bank to intervene with enormous bond buying (the BoJ has already broken its monthly record of purchases in January) just to maintain the cap. A bizarre situation if they were in fact planning to abandon the policy entirely.

MUFG analysts called the meeting correctly:

“The BoJ’s decision last month to expand the range for the 10Yr JGB yield from 25bps to 50bps under its yield curve control operations came as a surprise, but we think the BoJ will continue to use JGB purchases and pooled collateral operations to manage yields for now, ahead of the nominations for the new BoJ governor and deputy governors in the January ordinary Diet session”

While the unchanged outcome did see some of the hype unwind as traders were forced to cover short positions against Japanese government bonds, the question still remains… What happens next?

Will the Bank of Japan achieve the normalisation of monetary policy?

This is still very much an open question. The Bank of Japan also published their outlook at today’s meeting and the forecasts for economic growth and inflation don’t exactly scream urgency.

Chart by ING

Economic growth seen weaker than previously thought and CPI is expected to remain below the 2% target this year and next…

Nonetheless, the risks should not be ignored. Economics is often a relative game, and the gap between Japanese yields and other major economy yields is (was?) widening. Plus the Bank of Japan’s bond market really doesn’t function well due to the sheer volumes of bonds owned by the central bank themselves.

Likewise, the government is pushing companies to raise wages. Japan’s trade and industry minister Yasutoshi Nishimura said today that he hopes companies will hike pay by 5% “plus something extra” this year. Japanese wage growth has been stagnant for years so this would be big news if achieved… He added:

"Of course, monetary policy is going to be normalized in the future but until we can see a clear path in the future, I understand the BOJ is going to maintain its current policy,"

ING echo that point, and see no change before the new governor replaces Kuroda on April 8th.

“We maintain our view that the BoJ will keep its negative policy rate and yield curve control policy by the end of 2023, for now. We expect the new governor to first adjust the BoJ's forward guidance and then call for a policy review, but we will revisit our BoJ policy outlook once we know who is the next governor”

The next BoJ meeting takes place on the 9th & 10th March.