Will the Bank of Japan tighten policy?

BOJ meeting preview: forecasts of nine major banks, possible changes in YCC

2023-09-01 14:26:49

The Bank of Japan's Monetary Policy Committee (MPC) will meet on Friday, July 28, and ahead of the interest rate decision, we provide forecasts from economists and researchers at nine major banks.


Will the Bank of Japan tighten policy on Friday? Despite the Japanese central bank's likely inaction, some banks expect it to extend its yield curve control (YCC).


Standard Chartered

We expect the Bank of Japan to leave the discount rate unchanged. While some market participants expect a change in the YCC on the back of a weaker Japanese yen, we believe the BoJ will adopt a wait-and-see stance for at least the next two months. Given the prolonged deflation in Japan, the BoJ is likely to maintain a dovish policy stance for the time being. Despite strong GDP growth in Q1, it remains to be seen whether this growth will be sustainable. Japan's core CPI inflation has remained above 3% since September 2022, but it is likely to fall below 3% in the second half of the year. To keep inflation consistently above 2%, the BOJ will likely want to see stronger wage growth. While wage growth for large corporations is above 3%, real wage growth remains negative, highlighting the challenge of achieving sustainable wage growth.



We believe that the recent fluctuations in the Japanese currency and government bond markets reflect market expectations for a tightening of monetary policy. A decision is very close, but we still believe a tightening of the MPC is possible given that recent data suggest a steady rise in inflation and a sustained economic recovery.


Credit Suisse

We expect the Bank of Japan to maintain the status quo. Market expectations are mixed and have recently been leaning towards a small YCC adjustment. We do not rule out such a small change as a risky option, but we do not envision any significant change that could be perceived as the end of monetary easing. Therefore, any change should be akin to operational fine-tuning for continued easing. The BOJ has consistently reiterated that the Japanese economy still needs further monetary easing and that positive real wage growth is particularly important. In our view, any abrupt and severe change in this stance would undermine the credibility of forward guidance and hence increase the risk of it spreading to long-term interest rates.



We expect the Bank to leave all monetary policy levers unchanged without changing the YCC. Ueda's comments have been dovish lately, and Uchida has also warned against premature policy changes. We will have updated forecasts and expect the FY24 inflation forecast (the most policy-relevant forecast) to remain unchanged at 2%, which may indicate that there will be no change in the BoJ's stance anytime soon.



While Ueda has dismissed expectations of a change in policy stance at the BOJ's July meeting, he continues to argue that any change in the YCC should come as a surprise. Therefore, we believe that if the BoJ wants to surprise the market, it could either: further widen the band around the 10-year 0% target, or shorten the maturity of the YCC target to 2-year JGBs. We believe the latter option is more likely. We maintain our view that the BoJ will reduce the YCC target to 2 years from 10 years at its upcoming meetings, with little expectation that this will happen this week.


Deutsche Bank

We believe the probability of a monetary policy review is around 40%, but we still expect no change in monetary policy. We believe the BoJ will raise its inflation forecast for FY2023 but lower it for FY2024 and continue to emphasize downside risks, while leaving the growth forecast unchanged.  



We expect the BOJ to maintain its core monetary policy, i.e. YCC and ETF purchases. We expect the BOJ to revise upward its inflation forecast at this meeting. However, given the current direction of non-manufacturing price transmission, the BOJ will reiterate its stance that wages are likely to rise as the outcome of this year's spring wage negotiations will have an impact on wages over the summer, but the outlook will be uncertain. He will add that the change in wage and price setting behavior of firms can be seen in recent price changes, but it is unclear how long this will last. Moreover, an upward revision to the inflation forecast is unlikely to be a reason to extend the range. This is because the BoJ has so far explained that the YCC adjustment is not a tightening of monetary policy, but rather a change to improve the sustainability of monetary policy easing. Going forward, we continue to believe that the BOJ may widen the range at its September meeting.



We expect the BOJ to maintain monetary policy, including the YCC. The key question is whether the YCC will adjust. Market participants expecting tightening have very different views on Japan's inflation outlook compared to those not expecting tightening. We expect the median forecast of BOJ members in the July forecast report to show three-year inflation above 2% starting in FY22. However, given that the BOJ cannot yet be confident that inflation will remain at 2% in FY24, it would likely choose to backtrack with the risk of inflation exceeding 2% rather than a premature tightening cycle that could slow the economic recovery and prolong low inflation.


Wells Fargo

We believe it may be too early in the month for the Bank of Japan to make further adjustments to its monetary policy. Specifically, we expect the central bank to keep the policy rate at -0.10%. We also expect the BOJ to maintain its target for the 10-year Japanese government bond yield at 0.00% with a tolerable range of +/- 50 basis points. However, we realize that the July meeting will be closer than usual and will pay close attention to the BOJ's updated CPI forecasts. If these forecasts are at or above 2% for the next two fiscal years, it could signal an imminent policy change in the coming months. We currently expect the BOJ to announce further YCC policy tightening in October.  


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