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On October 31, the Bank of Japan is scheduled to hold its Monetary Policy Committee meeting. Researchers and economists predict that policy won’t change, but opinions on whether to make another adjustment to Yield Curve Control (YCC) will differ.
The benchmark 10-year JGB yield is getting close to reaching its highest point since July 2013, which is forcing the BoJ to talk about further easing of the YCC at the policy meeting in October. In October, the “core-core” index increased by 3.8% while the Tokyo core Consumer Price Index increased by 2.7%. The BoJ is expected to upgrade its core consumer inflation forecast to at least 2.0% in 2024 and raise it to nearly 3.0% for the year ending in March 2024.
At its meeting, the BoJ may decide to abandon its guidance on further easing measures, according to some economists who anticipate it staying on hold. The upward pressure on bond yields may prompt adjustments to YCC, which could be discussed in upcoming meetings. By Q2 2024, though, it’s anticipated that YCC will be completely abandoned.
Despite pressure to tighten due to high inflation and challenges from a depreciating Japanese Yen (JPY), other economists concur that the BoJ could remain on hold. The 10Y Japanese government yield is close to the 1% cap imposed by the BoJ, and the JPY is currently trading above 150 against the USD, making the BoJ meeting exciting.
Given that the composite PMI fell below the 50-point mark this year for the first time, at 49.9, it is thought that the economic recovery has slowed down. The data does, however, point to another adjustment to the BoJ’s yield curve control this year, most likely during the meeting that concludes on Tuesday.
The BoJ’s intervention in JGB is also a result of the recent spike in global yields.
The current policy settings appear unlikely to change, but the likelihood of another YCC tweak increases with changes to the forward guidance. Additionally, the market will be more focused on the BoJ’s quarterly growth and inflation forecast. The market is likely to interpret a revision to the central bank’s inflation forecast for fiscal year 2024 of more than 2% as a sign that policy normalization is drawing near.
Although it’s a close call, the BoJ will update its framework for monetary policy. TDS now anticipates that the BoJ will adjust its YCC parameters, increasing the rate of its fixed rate purchase operations and expanding the reference range for 10y JGBs to 1.5%.
However, given growing concerns about widening yield differentials and increasing pressure on the Yen, some economists project a 50/50 chance that the BoJ would increase its de-facto cap on the 10-year JGB yield from 1% to 1.5%.
As of right now, it is anticipated that the BoJ will continue the current YCC policy and hold its policy interest rate at -0.10%.
