In his inaugural press conference as Bank of Japan governor on April 10, the 71-year old academic Kazuo Ueda had to choose his words carefully. With Japanese consumer price inflation at a multi-decade high, and the gap between BoJ and other central bank policy now yawning, the arrival of a new helmsman would allow bond investors to let their imaginations run freely.
They had been speculating that the BoJ would normalise its policy for some months. But their narrower, and more immediate concern, was whether, under new leadership, the BoJ would quickly abandon the yield curve control (YCC) regime it has deployed since 2016 to hold rates on the benchmark 10-year JGB at around zero per cent.
Based on the Ueda press conference, the ostensible answer appeared to be “no”. But, ahead of his first monetary policy meeting as governor, on April 27-28, some prominent economists wonder if this is a misreading. A number of them now argue that YCC could be scrapped later this month, or in an ad hoc announcement in mid-May — and will certainly be gone by June.
But what supports this view? The stance of the previous regime would remain in place, Ueda assured the audience at his press conference. He also pointed out that it was hard to judge whether the conditions required for a theoretical normalisation — the BoJ’s 2 per cent inflation target — had yet been reached in a sustainable way.
When asked directly about the tenacity of the YCC regime, the new governor said: “In light of the current economic, price and financial conditions, it is appropriate to maintain the yield curve control for now.”
Those comments, according to Bank of Singapore economist Mansoor Mohi-uddin, support the thesis that Ueda sees Japan’s current inflation as potentially transitory and are in line with the view that the market should not expect any immediate changes to the BoJ’s yield target, or to its negative deposit rate of -0.10 per cent.
And although UBS economist Masami Adachi still predicts that YCC will be abandoned in June or July, he says the press conference has lowered the conviction behind that call. In fact, he thinks an alternative path — in which the tolerance band of the YCC is expanded, or its focus moved to the shorter, 5 year, end of the yield curve — would be more consistent with Ueda’s comments at the press conference.
Following Ueda’s remarks, the temperature of market speculation over policy normalisation cooled. And, without the support of the normalisation updraft, the yen began to fall, sliding below previous multi-week lows in the ensuing days.
But Ueda’s wording, argues Nomura’s chief rates strategist Naka Matsuzawa, can be also be viewed as consistent with the theory that there are now serious plans to jettison YCC. He suggests that the more seriously the BoJ’s new leadership was considering policy changes, the less would be conveyed at the press conference. “In this respect, we could take . . . the press conference as an attempt to fool the market,” says Matsuzawa.
Others note that a great deal hinges on how the phrase “for now” is understood. The Japanese words do not, by convention, imply the indefinite, open-ended timescale they suggest in English. On the contrary, says JPMorgan economist Ayako Fujita, the phrase offers only a very literal truth about how the speaker judges matters at that very moment. Economic conditions, she notes, can change tomorrow, next week or next month and the term “for now” provides no linguistic commitment to the status quo.
Fujita believes that scrapping the YCC has, in effect, become a pre-requisite for the new governor starting his job of governing. In her assessment, Ueda plans to normalise interest rate policy and, in order to do so, wants to restore a form of “normal” communication between the BoJ and the market that has not been possible with the central bank deploying unlimited resources to maintaining the YCC target.
If Ueda’s words at the press conference are parsed correctly, claims Fujita, there is a subtle but distinct message: that he has now intellectually separated the YCC policy from the negative interest rate regime and the other pillars of the BoJ’s dovish monetary stance. For purely practical reasons, Fujita thinks the April meeting may prove a little too soon to pull out of YCC. So the favoured method may be to scrap it at an ad hoc event held shortly after Japan returns from its Golden Week national holidays, in early May.
But there is still a big difficulty to overcome, points out Nomura’s Matsuzawa: preparing the way for policy change with the government. Many members of the ruling LDP party are still strong advocates of the ultra-loose “Abenomics” policies that the BoJ under Haruhiko Kuroda supported with its own stance
“There could be policy changes at the April meeting since the market is pricing in this possibility appropriately,” writes Matsuzawa in a note to clients. “But politics could be the biggest obstacle. There is also a risk that, as the BoJ lays the ground for changes, the government could leak the BoJ’s intention to change policy.”
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