Bank Of Japan To Bring Flexibility To Yield Curve Control

The Bank of Japan decided to bring greater flexibility to the yield curve control and to maintain its ultra-loose monetary policy on Friday.

The bank board, led by Governor Ueda Kazuo, decided to continue to allow the yield on 10-year Japanese government bonds, or JGBs, to fluctuate in the range of plus and minus 0.5 percentage points from the target level.

However, the central bank said it will conduct the yield curve control with greater flexibility, regarding the upper and lower bounds of the range, without setting “rigid limits”.

The bank will offer to buy 10-year JGBs at 1.0 percent every business day through fixed-rate operations, unless no bids are submitted. The previous rate was 0.5 percent.

The board also decided to maintain a negative interest rate of 0.1 percent on current accounts that financial institutions maintain at the central bank.

The board voted 8-1 on the yield curve control. Meanwhile, the decision on the short-term policy rate was unanimous.

Capital Economics economist Marcel Thieliant said a slowdown in inflation will convince the BoJ to keep its short-term policy rate unchanged over the coming months, but amidst mounting signs of a virtuous cycle between inflation and wages, the risks of the Bank tightening policy in earnest are rising.

The BoJ said inflation is likely to decelerate with a waning of the effects of a pass-through to consumer prices to cost increases led by the rise in import prices.

However, inflation will rise again moderately as the output gap improves and the medium to long-term inflation expectations and wage growth rise.

The inflation outlook for the fiscal 2023 was upgraded to 2.5 percent from 1.8 percent, while the estimate for the fiscal 2024 was lowered to 1.9 percent from 2.0 percent. Inflation for the fiscal year 2025 was projected at 1.6 percent.

The economy is set to continue recovering moderately underpinned by the materialization of pent-up demand, the bank said. Thereafter, the Japanese economy is forecast to continue growing at a pace above its potential growth rate as a virtuous cycle from income to spending intensifies.

Real GDP growth for the fiscal 2023 was estimated at 1.3 percent, revised down 1.4 percent estimated previously. At the same time, growth forecast for the fiscal 2024 was retained at 1.2 percent and that for 2025 at 1.0 percent.

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