The Bank of Japan will gradually build a case for a major overhaul of its stimulus framework in the second-half of next year, using the results of a review to support its move, according to Bloomberg Economics.
Governor Kazuo Ueda is aware that the current yield curve control stimulus framework is unsustainable, as it distorts prices, lacks flexibility, needs big purchases of government bonds and leaves the yen vulnerable to speculators, BE’s Taro Kimura wrote in a report released Tuesday.
But from Ueda’s experience as a board member who voted against a premature rate increase in the early 2000s, the governor is also wary of abandoning stimulus too quickly, Kimura wrote. He will instead use the review to support a case for ambitious change after a modest start at the helm, he said.
“We think the least-bad option for Ueda is to restore the Overnight Call Rate as the policy rate and anchor it at zero, and continue quantitative easing — but with a reduced amount of JGB purchases,” Kimura said in the report, referring to BE’s baseline scenario.
Market speculation of abrupt policy change at the BOJ has been simmering since last year when global yields surged and the yen tanked to a low of more than four decades. From the moment he emerged as Prime Minister Fumio Kishida’s choice as the BOJ’s new chief, Ueda has tried to tamp down expectations that he will speed ahead with change.
Concern over a global economic slowdown and jitters in the financial sector have also helped relieve some of the market pressure on the BOJ to tinker with its control of yields again after a surprise move in December.
At his first policy meeting at the helm of the bank, Ueda made the BOJ’s guidance more neutral and called for a review that may last up to 18 months. But Ueda also said the central bank could act on findings from the review before it was completed.
In BE’s main scenario, the BOJ would continue to buy bonds under its revamped stimulus, but would be less susceptible to speculative attacks by removing yield or purchase targets.
If global yields renewed pressure on the YCC framework by, for example, causing a fresh slide in the yen, the BOJ might consider a “stop-gap policy tweak” at an earlier stage. In this risk scenario, the BOJ may widen the range around its yield target or shift it to the five-year bonds instead of 10 years.
Kimura said an alternative scenario in which Ueda takes advantage of benign market conditions to abandon YCC altogether over the coming months as “less plausible” given the damage it would impart on Ueda’s clear communication strategy.
The central bank next meets on June 15-16. Around two-thirds of economists surveyed by Bloomberg before Ueda’s first meeting in April expected the BOJ to tighten policy by July.
