Increasingly nervous BoJ due to overly weak Yen still not expected to move at October meeting

bank of japanBank of Japan

Alicia García Herrero | The Bank of Japan (BoJ) is in the spotlight once again. While the crisis in the Middle East deepens, higher oil prices have lifted the US 10-year Treasury yield beyond 5% although it has retrenched a little once again. At the same, the 10-year JGB yield is capped by the BoJ’s Yield Curve Control (YCC) at 1%. On the back of a further widening interest rate differential between the US and Japan, the Yen rapidly depreciated and even moved briefly above USDJPY=150 while the 10-year JGB yield has gotten close to its ceiling, hovering around 0.88%. 

The question is how the BoJ will react on Tuesday at the October meeting. On the one hand, the possibility of a further adjustment of the YCC at the October meeting is increasing even if economic conditions are different from those in December 2022 when the BoJ suddenly raised the ceiling on the YCC to 0.5% (and again to 1% in July 2023). While surging import prices lifted CPI inflation at the end of 2022, CPI has recently softened on the back of declining import prices. Softer service prices could reinforce the downward trend in inflation, unless wages pick up. Because wage growth has remained weak at the aggregate level (with +1.3% wage growth year-on-year, it is still unclear whether the surge in inflation will only be transitory.

The other big question mark is whether global bond yields will remain high, or if it will be temporary. This depends, among other factors on oil prices, which are related to the crisis in the Middle East. Also, the Fed is likely to begin to ease from early 2024. 

Governor Ueda could make a pre-emptive move in October also to avoid an increasingly distorted yield curve. However, we find it more likely to have the BoJ remain on hold to waiting for a broader and more sustainable increase in wages which can push up inflation to the level of the BoJ objective more permanently. Meanwhile, the Yen weakness may call for foreign exchange intervention.