On the face of it, BOJ Governor Kazuo Ueda and his colleagues made few policy changes at their latest meeting. The short-term interest rate remains negative, while the official yield target for 10-year Japanese government bonds is unchanged at 0%. The central bank had already permitted wider yield fluctuations; Tuesday’s shift was to describe a 1% yield on 10-year JGBs as an “upper bound” rather than a hard cap.
Such semantic shifts are nevertheless significant in an economy which has grappled with the threat of deflation for a generation. The 10-year JGB yield on Tuesday exceeded 0.95% for the first time since former BOJ Governor Haruhiko Kuroda embarked on his radical campaign of loose monetary policy a decade ago. Yields will probably rise further in coming days as traders test the limits of the central bank’s tolerance for higher long-term borrowing costs.
However, the real challenge for Ueda is when to end the era of negative short-term interest rates. The BOJ now expects core inflation – which excludes the cost of fresh food – to exceed its target and reach 2.8% in 2024. However, the central bank’s projection for price increases in 2025 remains a modest 1.7%. It must also consider the possible impact of even slightly tighter monetary policy on banks, insurers and pension funds which have not experienced sustained positive interest rates since the 1990s.
The downside of this caution is that bond yields are rising much faster in other developed economies. The yield on 10-year JGBs has risen by about 50 basis points since the beginning of the year; equivalent U.S. government bonds have gained as much in little more than a month. The gap between the two has once again risen to 4 percentage points. That will keep up the pressure on the yen , which weakened against the U.S. dollar on Tuesday.
Ueda and his colleagues are probably right to cautiously inch their way back to interest rate normality. Their problem is that, in the rest of the developed world, the definition of normal keeps shifting.
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CONTEXT NEWS
The Bank of Japan on Oct. 31 loosened its grip on long-term interest rates by again tweaking its bond yield control policy.
The BOJ’s nine-member board maintained its target for short-term interest rates of -0.1%. It kept its target for the 10-year government bond yield at around 0%. But the central bank redefined a yield of 1.0% as a loose “upper bound” rather than a rigid cap and removed a pledge to defend the level with offers to buy unlimited amounts of bonds.
The BOJ revised upwards its 2024 forecast for core inflation, which excludes fresh food, to 2.8% from its 1.9% projection in July. It now expects the measure of prices to rise 1.7% in 2025, a slight increase from the previous forecast of 1.6%.
The yield on 10-year Japanese government bonds rose to 0.946% by 0500 GMT on Oct. 31, from 0.892% the previous day. But the yen tumbled by 0.68% to 150 against the U.S. dollar as traders focused on the BOJ’s dovish pledge to “patiently” maintain its accommodative policy.
