On December 19, the Bank of Japan released the results of its last monetary policy meeting of the year: keeping the ultra-loose monetary policy unchanged. Bank of Japan Governor Kazuo Ueda also did not give clear guidance on future monetary policy. The yen fell quickly after the announcement, while the Japanese stock market closed sharply higher.
Monetary policy has not shifted
On Tuesday (December 19), the Bank of Japan unanimously decided to maintain interest rates at the level of -0.1% while sticking to its yield curve control (YCC) policy and keeping the 10-year JGB yield cap reference value at around 1%, in line with market expectations.
In addition, the Bank of Japan gave monetary policy guidance as follows: "The Bank of Japan will continue to maintain financial stability, mainly corporate and financial market stability, and will not hesitate to take additional easing measures if necessary." ”
Japan 10-year government bond yield (2020 to date)
In its monetary policy statement, the Bank of Japan said that the Japanese economy has recovered moderately, corporate profits and business sentiment have improved, and corporate fixed asset investment has been showing a moderate growth trend. Japan's employment and income situation improved modestly. Despite rising prices, private consumption continued to grow modestly. In contrast, housing investment has been relatively weak.
On the price front, market expectations for inflation have risen modestly. The year-on-year growth in the consumer price index (CPI, everything except fresh food) was slower than in the previous period, mainly due to the government's economic measures that pushed down energy prices.
Regarding the outlook for the Japanese economy, the Bank of Japan said that although it is expected to be under downward pressure from the slowdown in the pace of economic recovery overseas, the Japanese economy is likely to continue to recover modestly supported by factors such as the release of demand. In addition, the Japanese economy is expected to continue to grow at a rate higher than its potential growth rate as the virtuous cycle of income to expenditure intensifies. The year-over-year increase in CPI (all items except fresh food) could exceed 2% by FY2024 due to factors such as the residual impact of price pass-through to consumers. Thereafter, the pace of growth is expected to decelerate due to the dissipation of these factors. At the same time, as the output gap turns positive, and medium- to long-term inflation expectations and wage growth rise, potential CPI inflation is likely to gradually increase and eventually achieve the goal of price stability.
In order to stimulate economic activity and improve deflation, the Bank of Japan has been regulating government bond yields through buying operations since 2016, and judging the effect of monetary policy by aiming for a 2% increase in the consumer price index (CPI). However, since last year, driven by factors such as the depreciation of the yen and rising international energy prices, as of September this year, Japan's CPI has exceeded the Bank of Japan's regulatory target for 18 consecutive months. In order to alleviate the failure of the bond market mechanism caused by human intervention and cope with the pressure of yen depreciation, the Bank of Japan began to gradually relax the upper limit of the long-term interest rate control target at the end of last year. Against the backdrop of the recent Bank of Japan's policy adjustments, long-term interest rates have risen rapidly. The yield on Japan's new 10-year government bonds, an indicator of long-term interest rates in the bond market, rose as high as 0.955% on October 31.
Kazuo Ueda: The probability of a rate hike in January next year is very low
At a subsequent press conference, Bank of Japan Governor Kazuo Ueda said that the probability of a rate hike in January next year was low.
Bank of Japan press conference (Source: Bank of Japan)
As far as monetary policy is concerned, Kazuo Ueda said that the current negative interest rate does not pose a serious problem for businesses and residents, and there is no need to quickly cancel it. While negative interest rate policies do have adverse effects, it is not possible to quantify the side effects. There is a lot of uncertainty about the outlook for the Japanese economy, and it is uncertain whether the inflation target will be met. He stressed that it is difficult to determine a plan for exiting the negative interest rate policy at present, and there is no detailed plan for the specific policy sequence to be adopted when exiting the negative interest rate policy.
Kazuo Ueda said that there will be some data before the next policy meeting, but not much, so the chances of a rate hike in January next year are not high, depending on the information available at that time. Kazuo Ueda stressed that even if the Bank of Japan does raise interest rates, financial market conditions will remain accommodative.
Regarding the inflation issue that the market is concerned about, Kazuo Ueda said that there are signs of rising wages in Japan, and wage growth is helping to drive the monetary policy shift, and it is expected that by fiscal 2025, the probability of a gradual increase in the underlying inflation rate and approaching the 2% target is rising. But he also said that the Japanese economy is in the early stages of recovery, and economic and price uncertainty remains high.
He also said that for now, if the U.S. economy can achieve a soft landing, it will also be good for the Japanese economy. We will continue to maintain close communication with the government to implement appropriate monetary policy, and review not only the data, but also hearings on the virtuous cycle of wage prices.
The yen fluctuated downward
The yen continued to weaken after the Bank of Japan announced a monetary policy decision that dashed market expectations, with USDJPY breaking above 143. After hitting a new year-to-date high of 151.9105 in early November, the yen began to slowly strengthen, with USDJPY retreating from 151 to 141 at one point. However, judging from the statement of the Bank of Japan, in the short term, the yen is still likely to remain weak.
The Bank of Japan and the governor of the Bank of Japan did not end the ultra-loose monetary policy in the slightest, which surprised many investors. After nearly a month of strength, the yen is back in weakness today.
USDJPY (as of 18:38 EDT)
In fact, since the beginning of this year, the yen has either depreciated or is on the way to depreciation. Year-to-date, the yen has depreciated by more than 10% against the dollar.
USDJPY Trend (Year to Date)
The Japanese stock market, which was also stimulated by the central bank's ultra-loose policy, began to rally rapidly in the afternoon, closing up 1.41%.
Nikkei 225 Index Trend (19th December)
Year-to-date, Japan's stock market has been volatile and upward, up more than 27% for the year.
The Nikkei 225 index is moving this year
Although the Bank of Japan is not sure when the ultra-loose monetary policy will end, Nomura Orient International analysts Hou Suhan and Qi Zongchao believe that the time for the Bank of Japan to lift the negative interest rate policy will be brought forward to January 2024. In addition, they also forecast that the timing of the cancellation of the Treasury yield curve (YCC) policy will remain unchanged, which is expected to occur between April and June 2024 (April is expected).
According to Nomura, the current domestic news reports have raised the possibility of a "virtuous circle between wages and prices", and as Bank of Japan Vice President Himino said, there are benefits to withdrawing from monetary easing. And speculation in financial markets could also force the Bank of Japan to end early.
In terms of exchange rates, Nomura Orient International lowered its forecast for USDJPY at the end of December 2023 and the end of March 2024, believing that USDJPY could fall to 140 by mid-2024.
Editor-in-charge: Zhu Yumeng Proofreader: Liao Shengchao
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