BOJ’s monetary policy meeting signals concessions on inflation uncertainty; April–June 2024 likely timing for ending Yield Curve Control (YCC) and Negative Interest Rate Policy (NIRP)
At its July 28 Monetary Policy Meeting (MPM), the Bank of Japan (BOJ) adopted a more flexible approach to yield curve control (YCC), effectively altering its policy framework. The BOJ will continue to guide the 10-year Japanese Government Bond (JGB) yield around 0%, allowing it to fluctuate mainly within ±0.5 percentage points. However, the Bank raised the hard cap triggering fixed-rate bond purchases from 0.5% to 1.0%, allowing greater yield flexibility.
The BOJ justified this policy shift by emphasizing the need to “patiently continue monetary easing,” given no clear path yet to a sustainable and stable 2% inflation target. It cited elevated uncertainty around economic activity and prices, suggesting that a more flexible YCC conduct will enhance the sustainability of easing efforts.
The rationale for more flexibility includes: (1) if upside economic and price risks materialize, real interest rates can decline and bond market functioning be supported, maintaining accommodative policy; (2) if downside risks appear, long-term rates have room to fall, keeping policy accommodative.
The decision was approved by an 8-1 majority on the policy board, with only Toyoaki Nakamura dissenting. Nakamura agreed with greater flexibility in principle but recommended waiting for clearer evidence that corporate earnings had strengthened.
Inflation outlook and policy stance
The BOJ’s July Outlook for Economic Activity and Prices showed median core CPI inflation forecasts of +2.5% for FY2023, +1.9% for FY2024, and +1.6% for FY2025, largely unchanged from April except for an upward revision in FY2023. Despite these forecasts, the BOJ remains cautious about sustainably achieving its 2% target, driving the decision to loosen YCC.
The report highlighted significant uncertainty in inflation forecasts, with many board members seeing upside risks for FY2023 inflation and mixed risk views for FY2024 and FY2025.
Future policy scenarios
We outline three scenarios for BOJ policy:
- Main scenario (60% probability): The BOJ’s announced YCC flexibility replaces a formal policy change. We expect YCC and NIRP to end by H1 2024, most likely April–June. However, no quantitative tightening or positive interest rates are anticipated in 2024.
- Risk scenario A (30% probability): The BOJ could end YCC sooner, between September and December 2023, if inflation proves sustainably stable, with NIRP ending in early 2024 at the earliest.
- Risk scenario B (10% probability): Deterioration in the global economy or inflation outlook could delay YCC and NIRP withdrawal until H2 2024 or later.
