Investors have continued to push up Japanese government bond (JGB) yields as they anticipate the BOJ will phase out its yield control under a new governor. Prime Minister Fumio Kishida also commented that a decision on revising Japan's decade-old plan for defeating deflation will be made after a new BOJ governor is appointed.
The BOJ shocked markets last week by widening the allowance band around its 10-year JGB target, a move intended to ease some of the cost of prolonged stimulus. Kuroda stated that this decision was meant to enhance the effect of ultra-easy policy rather than signal the beginning of a withdrawal from its massive stimulus program.
BOJ Governor Discusses Japan's "Critical Juncture" in Breaking Out of Low Inflation and Growth
In a speech delivered to the business lobby Keidanren, BOJ Governor Haruhiko Kuroda discussed Japan's approach to a "critical juncture" in breaking out of a prolonged period of low inflation and low growth. Kuroda noted that intensifying labour shortages and structural changes in the job market are leading to higher pay for temporary workers and an increase in the number of permanent workers, which will likely result in gradually increasing wage growth.
Kuroda stated that "labour market conditions in Japan are projected to tighten further, and firms' price- and wage-setting behaviour is also likely to change." He added that "in this sense, Japan is approaching a critical juncture in breaking out of a prolonged period of low inflation and low growth." The strength of wage growth is seen as a key factor in determining when the BOJ may raise its yield curve control targets, which are currently set at -0.1% for short-term interest rates and around 0% for the 10-year bond yield.
Potential Changes to BOJ's Joint Statement with Government Considered
There are indications that the government of Prime Minister Fumio Kishida may consider revising the joint statement with the Bank of Japan (BOJ) that focuses on steps to beat deflation. This goal has become out of sync with recent rises in inflation, and has prevented the BOJ from adjusting monetary policy more flexibly. Analysts believe that any such revision could increase the likelihood of a change to the BOJ's ultra-low interest rates.
Kishida offered few clues on his choice for the next BOJ governor, stating only that the new appointee would be the person "deemed most appropriate" at the time. The BOJ's Governor, Haruhiko Kuroda, is set to finish his second five-year term in April of next year, leading to increased focus on what will come after his tenure.
Market Expectations for BOJ's Yield Control to End Under New Governor
Markets and policymakers are signaling increasing focus on what will come after the term of Bank of Japan (BOJ) Governor Haruhiko Kuroda ends in April of next year. Investors have continued to push up Japanese government bond (JGB) yields on expectations that the BOJ will phase out its yield control under a new governor. Prime Minister Fumio Kishida also stated that a decision on whether to revise Japan's decade-old blueprint for defeating deflation will be made after a new BOJ governor is appointed.
The BOJ's yield curve control (YCC) targets, which are currently set at -0.1% for short-term interest rates and around 0% for the 10-year bond yield, are closely watched as they may be raised based on the strength of wage growth. The BOJ's bond buying to defend the yield cap has drawn criticism for distorting market pricing and causing an unwelcome yen fall that has increased the cost of importing already expensive raw materials.
