Although Bank of Japan Governor Kazuo Ueda is not yet ready to announce the end of the old policy era, the bank is gradually approaching a new era of ending its long-standing unconventional monetary easing policies.
The Bank of Japan said on Tuesday that it would regard the 1% yield ceiling of 10-year Japanese treasury bond as a reference point rather than a rigid limit. The central bank has significantly raised its price expectations, stating that the inflation rate may remain around 3% until early 2025.
The Bank of Japan has controlled the yield of 10-year treasury bond since 2016. In contrast, in the United States and most other developed countries, this interest rate is usually determined by market forces. This measure by the Bank of Japan, known as yield curve control, is one of the many unconventional monetary easing measures taken by the bank over the past 25 years to address the issue of long-term price stability or decline.
Now, due to the stable and positive inflation rate, the Bank of Japan has begun to reverse those unconventional measures. One example is the loosening of control over the yield of Japanese treasury bond bonds. Another sign is that analysts expect Japan to end its policy of negative short-term interest rates by early next year.
Marcel Thieliant, an economist at Capital Economics, said that the Bank of Japan actually gave up control of the yield curve on Tuesday.
However, Bank of Japan Governor Kazuo Shibata maintained a more relaxed tone at the press conference, stating that he is not yet ready to announce the end of the Bank of Japan's actions to achieve a stable 2% inflation rate.
At present, we have not reached a situation where we can confidently foresee a sustained and stable achievement of this inflation target, "said Kazuo Ueda. He said he would rather let loose monetary policy continue for a period of time because" the risk of falling behind the trend is not very high ".
Kazuo Ueda stated that he hopes that the operation of the yield control policy will be more flexible and take into account the side effects, including foreign exchange fluctuations.
In July, the Bank of Japan raised the yield ceiling of 10-year Japanese treasury bond from 0.5% to 1%. Mr. Ueda admitted that due to the sharp rise in the yield of US treasury bond bonds, the yield of Japanese treasury bond rose faster than he initially expected, and quickly approached the upper limit of 1%.
Late Tuesday in Tokyo trading session, the yield of 10-year Japanese treasury bond closed at 0.95%, a 10-year high. Yoshitaka said that the yield is unlikely to significantly exceed 1%, as the Bank of Japan intends to curb speculative gains.
As Japan allows for more flexible interest rate hikes, other major central banks around the world are getting closer to ending their interest rate hikes aimed at fighting inflation. After 10 consecutive interest rate hikes, the European Central Bank kept interest rates unchanged last week. It is widely expected that the Federal Reserve will remain silent this week, despite recent strong economic data in the United States indicating the possibility of more rate hikes.
Bank of Japan Governor Kazuo Noda arrived at the bank's headquarters in Tokyo on Monday to attend the first day of a two-day policy meeting.
The huge interest rate difference between the United States and Japan has led to a significant depreciation of the yen against the US dollar in recent months.
Tetsuya Shigeta, Chief Financial Officer of Mitsui, a trading company, said, "Japan is also in a position to raise interest rates despite the continued high interest rates in the United States." However, he believes that the obstacles are considerable due to uncertainty in prices and wages.
The yen has recently fallen to around 150 yen per dollar, sparking speculation that the Bank of Japan may intervene to support the yen. According to data released by the Japanese Ministry of Finance on Tuesday, as of October 27th, the government has not made any yen purchases, even when the yen fell below the 150 yen mark against the US dollar. Many traders had previously believed that failing this level would prompt the Bank of Japan to intervene.
After the Bank of Japan relaxed its yield control, the yen has weakened to around 150.70 yen against the US dollar. However, the Bank of Japan's actions are not actual rate hikes, which often support the yen.
According to Kazuo Shibata, salary negotiations next spring will be the key to determining whether Japan can ultimately achieve a sustainable 2% inflation target. He said that given the good profitability of enterprises, the Bank of Japan expects stable wage growth next year.
The salary level adjusted for inflation in August fell for the 17th consecutive month. The Japanese Trade Union Federation, representing approximately 7 million members, is seeking a salary increase of more than 5% in the annual salary negotiations next spring.
Despite Watanabe's hesitation in announcing a policy shift, Naomi Muguruma, strategist at Mitsubishi UFJ Morgan Stanley Securities, stated that the tone of the Bank of Japan has changed.
The Bank of Japan is no longer eager to prevent a rise in long-term yields, "she said. The Bank of Japan seems to have considered the possibility of achieving the 2% inflation target when adjusting its policies