Bank of Japan Moves Closer to Normalization but Not There Yet

 | Dec 19, 2023 04:57

The Bank of Japan kept its major policy settings unchanged and made no changes to its forward guidance, pushing the yen down against the dollar. But we think the shift in tone is clear and major policy changes will be made early next year

-0.1% - Policy Balance Rate - 0.0% 10-year yield target

- As expected

h2 No Surprise From The Bank Of Japan/h2

The news that economic policy minister Yoshitaka Shindo would be in attendance at the Bank of Japan's policy meeting had sparked market speculation about a shift in policy sooner than expected. It is rare for a minister to sit in a BoJ meeting and, in the past, when the Bank delivered major policy decisions, senior government officials attended the meeting, thus the market had expected a somewhat hawkish move by the BoJ.

But it turned out that this was just the market's wishful thinking. In line with our view, the Bank of Japan unanimously decided to maintain its policy rate at -0.1% and its 10-Year yield target at 0.0% while keeping its dovish forward guidance "take additional monetary easing steps without hesitation if needed", which may have disappointed some market players the most. But it is too early to be disappointed. It should be noted that the BoJ's assessment of the economy, especially its assessment of prices and private consumption, has changed and it is more important to read between the lines. The BoJ's wording, in our view, paves the way for normalization next year. For example, the Bank said private consumption has continued to increase moderately, year-on-year CPI is likely to rise above 2% through fiscal 2024, underlying CPI inflation is likely to gradually increase, and inflation expectations have risen moderately.

h2 Governor Ueda Sounded Positive About Sustainable Inflation and Rising Wages But Not Strong Enough To Please The Market
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As the BoJ stood still and kept its dovish forward guidance unchanged, the market's focus rapidly shifted to what Governor Kazuo Ueda would say about future policy direction at his press conference.

Governor Ueda's comments on inflation and wage growth sounded quite positive, most notably, the "chances for hitting the 2% target are rising" and "steadily moving toward achieving stable 2% inflation". We believe that his remarks have opened the door for policy normalization. However, although the exit plan and the timing of such action are still quite ambiguous, he was clearly communicating with the market about the policy direction.

h2 Bank Of Japan's Policy Adjustments Over The Past 12 Months