Analysis: New BOJ Head’s Message to World: We’re Staying the Course – For Now

Kazuo Ueda, the new governor of the Bank of Japan (BOJ), has given a clear message to global finance policymakers gathered in the US over the last week. Japan aims to remain a “dovish outlier” by maintaining ultra-low interest rates, at least for now. Since taking over from his “dovish” predecessor Haruhiko Kuroda a week ago, Ueda has hinted that Kuroda’s massive stimulus package will eventually be phased out. However, Ueda is expected to take time to discuss when and how to shift the country away from ultra-loose policies. In the meantime, Ueda has reassured finance leaders of G7 and G20 nations that the low-interest rate policy will remain in place as inflation falls back below the BOJ’s 2% target later this year.

Scope to tweak YCC this year:

The Yield Curve Control (YCC) approach is a new monetary policy introduced by the BOJ to guide short-term rates at -0.1% and the 10-year Japan government bond yield around zero with an implicit cap of 0.5%. However, with inflation exceeding the BOJ’s target, the cost of prolonged easing is increasing, prompting speculation that Ueda will start to make changes to YCC this year. While Ueda has eemphasizedthat the BOJ’s priority is to avoid a premature exit and not to give any hint of shifting policy, analysts believe that there is scope for changes to be made to YCC as it has drawn criticism for distorting the shape of the JGB yield curve and crushing financial institutions’ margin.

Key Takeaway:

Ueda will chair his first BOJ policy meeting on April 27-28 to release new quarterly growth and inflation forecasts, which will be closely watched for signs of how soon the central bank expects inflation to meet its 2% target. While uncertainty still lingers over the world economy, highlighted by the International Monetary Fund’s stark warning of global recession risks, Ueda is expected to move slowly and cautiously.

Related Facts:

· In Japan, inflation is now around 3% and will slow down below BOJ’s 2% target on falling import costs later this year.

· The BOJ has been guided by YCC for some time to keep rate fluctuations from 0.1% to 0.2%.

· With the global recession looming, the BOJ chief wants to avoid a repeat of January’s market anticipation of a rapid pivot by the BOJ towards tweaking the YCC policy.

Conclusion:

Ueda’s message to global finance leaders is clear: Japan is sticking to its ultra-low interest rate policy for now. Although he has hinted that Kuroda’s massive stimulus package will eventually be phased out, discussions over when and how to do this will take time. Meanwhile, analysts believe there is room for changes to be made to the YCC policysoone, but Ueda is expected to take a cautious and measured approach.