Long unwinding road awaits BOJ after slackening reins on yields
TOKYO (Kyodo) -- The Bank of Japan on Tuesday effectively removed its yield cap in response to an unexpected surge in U.S. Treasury yields and entrenched cost-push inflation, sending its strongest signal yet that it is preparing to unwind monetary stimulus to come more into line with its global peers.
BOJ Governor Kazuo Ueda said the latest policy tweak is unlikely to cause 10-year government bond yields to rise sharply above the previously-set ceiling of 1.0 percent, and it is intended to pre-empt forex volatility and other risks that may materialize.
The Japanese central bank decided to allow 10-year Japanese government bond yields to rise above 1.0 percent, while retaining its overall framework that keeps borrowing costs low under the so-called yield curve control program. Rising U.S. Treasury yields are adding upward pressure on long-term interest rates in Japan.
Ideas:
The Bank of Japan is trying to find ways to keep pace with the US Federal Reserve without actually changing it ultralow policy too much.
Cost push inflation, which the variance between the US dollar and the Japanese yen has been continuing is a major challenge for the Bank of Japan.
At the time, as a way to not scare the markets, the Bank of Japan is beginning to signal that it "thinking" about changing its ultralow policy in maybe 2024.
Japanese government bonds might help but it can't completely prevent volatility in the currency exchange market.
Overtime, the Bank of Japan might not have a choice but begin to gradually change its ultralow rate policy. But the change might not even be that noticeable as the Bank of Japan is not going to do anything too drastic and may make slight incremental changes in 2024.
Article:
While the BOJ has not budged in its more than a decade-long commitment to monetary easing, focus now shifts to how much long-term yields will be allowed to rise and when the central bank will do the more difficult job of ending negative rates when it believes stable inflation backed by wage growth is achieved.
The impact of the move to loosen its grip on yields may not be enough to strengthen the yen as desired by the BOJ, and pressure could mount on the central bank to do more, analysts say, given the pain higher import costs are causing.
What influence higher long-term yields will have on the broader Japanese economy remains uncertain, though they will increase debt servicing costs for Japan, which has a debt load that totals more than twice its gross domestic product.
Ideas:
The Bank of Japan is not going to change anything too drastic, as changing its ultralow policy too much might signal that it was wrong with the current policy and they don't want to show that.
With it changing the yield rates might be a sign that it is beginning to show some compromise but not completely changing the policy.
Just what does the Bank of Japan consider as "stable inflation" as inflation has continued to affect companies and households for the past few years.
The Bank of Japan has to decide how much does it want to see the Japanese yen strengthen and or how much does is want to Japanese yen to remain weak. It has to decide on a range that all in Japan; Japanese exporters, foreign tourists, and the overall domestic Japanese economy can live with.
What the Bank of Japan has always reasoned, is if it increased the key interest rate too much or too high. like in the US and the EU, it would cause too much stress on companies and households who needs loans from banks.
Article:
"Yield curve control won't last forever because long-term yields should be determined by market forces," said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.
"What the BOJ is trying to do is to effectively scrap the cap and restore some normalcy to the bond market."
"The BOJ has been gradually paving the way for future steps, such as ending its commitment to guiding 10-year yields around zero percent. That would come while it carefully monitors yen moves and the prospect of wage growth," Kodama said.
Ideas:
Again, long-term yields have been used in place of increasing the key rate as the Bank of Japan, at the present time, is not ready to change its overall ultra-low policy.
The Bank of Japan, again, is using very small incremental steps to test the markets and see what the affects are at this time.
If the bond markets react and respond the correct way, then that might be a sign for further incremental step testing to see what happens in the Japanese economy.
Whether positive or negative the Bank of Japan seems to be waiting for Japanese companies to increase wages again in April 2024 as they might think wage increases will decrease the pressure on households related to inflation.
But the challenge, in the spring of 2023, only large companies, for the most part, increased wages, and 70 percent of Japanese wage earners don't work for large companies, which means of course 70 percent of Japanese wage earners might not have seen a wage increase April of 2023.
Article:
The yield curve control program was launched in 2016 under Ueda's predecessor Haruhiko Kuroda, setting short-term interest rates at minus 0.1 percent and guiding 10-year yields to around zero percent.
To address the negative effects of yield-depressing interventions in the bond market, the BOJ has made minor changes over the years. In July, the policy board decided to allow 10-year yields to rise toward the maximum limit of 1.0 percent but redefined the level as the "upper bound" at the meeting that ended on Tuesday.
"We wanted to modify and make it more flexible before long-term rates are pegged to their allowed limit," Ueda said at a press conference after the meeting. The benchmark 10-year yield rose to near 1.0 percent Tuesday ahead of the BOJ decision.
Ideas:
Again, the yield curve control program was setup so that maybe the Bank of Japan would not have to increase the key rate as maybe the yield curve would counter some of the negatives in the Japanese economy.
But overall, the Japanese yen continue to remain weak, and moved even weaker and inflation has continued on on Japan and inflation is expected to continue in 2024, but maybe not at the same strength.
Central banks need to be a flexible as possible as they have to navigate through multiple challenges at the same time and not try to interfere too much in an economy and upset normal market forces.
For example, the US economy is finally going to have a "soft landing" and there are no predictions of a recession in 2024.
Was it the result of the Federal reserves policies or action? Its hard to determine exactly if the actions of the US Federal Reserve had any effect on the inflation in the US.
Would the US economy, if allowed to run its course naturally, would the same result be the same, a soft landing? Its hard to say.
So back to Japan and the Bank of Japan and its ultra-low policy actions, has it been the correct actions, or should have done what the US and the EU has done? Who knows exactly.
Article:
Yoshimasa Maruyama, chief economist at SMBC Nikko Securities, said the BOJ sent a "clear message" that it will prevent long-term yields from surging because levels above 1.0 percent are not appropriate under the current macroeconomic conditions.
"We don't expect a further modification of yield curve control to ensure more flexibility before it starts to normalize policy in principle," Maruyama added.
A key factor to gauge the BOJ's confidence in achieving the kind of inflation it wants is the sustainability of wage growth.
Ideas:
Again, central banks, such as the Bank of Japan needs flexibility to deal with all of the challenges it faces, and keeping the long-term yield as 1.0 or below is better for the Japanese economy in its current condition.
Just what is a normal monetary policy these days, as the Japanese economy, sometimes, doesn't react or respond to normal economic conditions.
The Bank of Japan keeps signaling it wants inflation around 2 percent which is at the low end of what most central banks want, which is inflation between 2 and 4 percent.
Maybe the Bank of Japan thinks the economy is still too weak and can't handle higher inflation rates.
US inflation, back in 2022 was as high as 9 percent and now its down to around 3 percent overall, while inflation in Japan has never increased past 4.2 percent overall.
And again, it seems maybe the Bank of Japan is depending too much or expecting too much from Japanese economies to increase wages and they think that might reduce the stress on Japanese households related to inflation.
And again, 70 percent of Japanese wage earners don't work for large companies, which were the main wage increasers in April of 2023.
Article:
Japan's inflation rate has remained elevated much longer than expected, due largely to higher energy and raw material import costs. Price rises have weighed on consumer sentiment as real wages have fallen.
Based on the latest projections, core consumer inflation will have remained above 2 percent for three straight years by fiscal 2024.
The BOJ will likely allow long-term yields to rise if they reflect economic fundamentals, rather than speculative moves. Sharp gains, however, could hurt the economy and increase debt-servicing costs for Japan, which has relied heavily on debt to meet its spending needs.
Ideas:
Again, Japan's inflation has been relatively mild compared to inflation that was in the US and the EU. but because Japan was in a stagnant mode or de-flation mode for maybe a decade, Japanese households have been struggling with inflation levels of 3 and 4 percent.
Real wages are wages adjusted for inflation, which basically means, because of inflation in Japan households purchasing power has been reduced and continues to be reduced because of inflation.
So the 3.5 percent wage hike given to large companies employees in April of 2023, might not have been enough to counteract inflation as maybe inflation was 4 to 4.2 percent at that time.
Then of course, 70 percent of wage earners might have gotten a wage increases, as most small and medium sized company wage earners might not have seen a wage increase.
Again, maybe the reasoning of the Bank of Japan is that increasing the long-term yield rates too much is like increasing the key rate too much and it could be a challenges for bank borrowers how need to borrow for whatever reason to survive.
Article:
"Financial markets may test the BOJ's tolerance. That being the case, 10-year yields rising to as high as 1.25 percent can be justified," said Takahide Kiuchi, executive economist at Nomura Research Institute, who is a former BOJ board member.
The government has already raised its assumed long-term interest rate used to calculate debt-related costs to 1.5 percent for fiscal 2024, up from a record low 1.1 percent in the current year to next March.
The widening of the interest rate gap between Japan and the United States has sent the yen sharply lower against the dollar. The euro also hit a 16-year high versus the yen after the BOJ's decision, which came after the European Central Bank held off on another rate hike last week.
Ideas:
Financial markets might test the BOJ's tolerance to see what the Bank of Japan will do; will increase or decrease the yield.?
It remains to be seen just what actions the Bank of Japan will take, depending on what the financial markets respond to 1.25 percent increase.
It like a cat and mouse game between the Bank of Japan and the financial markets as to who is going do what and trying to anticipate each other's moves.
Also, the Bank of Japan, again and always, has to decide what range of the Japanese yen is best for the Japanese economy, as there are competing interests; some wanting a weak Japanese yen and some wanting a stronger Japanese yen.
The US Federal Reserve and the EU central bank, both recently, have held off on increasing its key rate, as in the US, for example, inflation has steadily declined and the economy it heading in the right direction.
Usually, but not always whatever the US Federal Reserve does, in increasing or decreasing the rate, central banks usually follow the same actions, except of course the Bank of Japan.
Article:
Yuji Saito, head of the foreign exchange department at Credit Agricole Corporate & Investment Bank in Tokyo, said 151.95 yen is seen as the next barrier for the dollar-yen pair.
"The BOJ would want to buy time until around January when it is expected to end its negative rate policy," Saito said, adding that a breach of the near-152 yen level will take it to 155 yen.
BOJ chief Ueda, an academic who served in the past as a BOJ board member, said the yen's weakness could mean people expect inflation to increase. If the yen continues to fall and pushes inflation significantly higher, this may warrant a policy change, he added.
Ideas:
It seems, but not sure exactly, as you don't think what the Bank of Japan is thinking, that every time, there is a barriers signaled for the the dollar-yen pair, it it it broken then eventually they signal another barrier.
It also seems to Bank of Japan, like most central banks, might always be buying time to see what the economy is going to do and or to test any incremental changes it puts into action.
The Japanese yen has been weak for some time and its been causing stress for companies and Japanese households for several years, without much intervention by the Japanese government or the Bank of Japan.
Article:
After Russia's war on Ukraine sent crude oil and other raw material prices higher, there are serious concerns the Israel-Hamas war could spill over into a wider Middle East conflict and drive commodity prices up further.
"We can't rule out higher crude oil prices and a weaker yen, which would add inflationary pressures," said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute, adding that future unwinding of monetary easing is no easy task. "The BOJ would have no other choice but to be strategically vague."
Ideas:
The Middle East conflict has been going on, one form or another, for decades, but yes, this time its worse and the Ukraine situation, whether on purpose or not, maybe some producers have used the Ukraine war situation to increase prices.
Japan needs, if they don't have them now. trade agreements with oil/energy producing countries as a way to control energy and oil prices as Japan is a resource-poor country and is at the mercy of energy producers.
Yes, unwinding the current monetary policy might take some time and is not going to take place all at once but most likely in incremental steps as to not disrupt the Japanese market economy or cause too much harm to financial markets in Japan.
Yes being strategically vague might be the best choice at this time, as too much noise of too much information, too fast could cause disruptions in the Japanese economy.
Have a nice day and be safe!
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