As of October 25th, the exchange rate between the Chinese yuan and the Japanese yen has remained at a rate of 1:20.5 since the beginning of this month.
At a time when the central banks of developed economies such as the Federal Reserve have already entered the end of this tightening monetary cycle, the Bank of Japan still maintains a negative interest rate policy. As inflation levels rise and economic growth expectations improve, market expectations for the Bank of Japan to adjust its current loose monetary policy have further intensified in the near future.
Local Japanese media recently reported that with long-term interest rates in Japan rising in sync with those in the United States, Bank of Japan officials are considering whether to adjust the Yield Curve Control (YCC) policy and are expected to discuss it at the October monetary policy meeting.
Since last year, the Bank of Japan has only made two adjustments to its loose monetary policy. The first time was in December 2022, when Tohiko Kuroda, then governor of the Bank of Japan, announced that the Bank of Japan would raise its long-term interest rate ceiling from around 0.25% to around 0.5%. At the monetary policy meeting in July this year, the Bank of Japan decided to maintain a large-scale monetary easing policy. And without changing the upper limit of the yield of 10-year Japanese treasury bond to 0.5%, the interest rate is allowed to rise to 1%. This decision means that the Bank of Japan has once again adjusted its YCC policy.
However, after the July monetary policy, the Bank of Japan remained cautious in its wording regarding exiting loose monetary policy and continued to emphasize the importance of maintaining loose monetary policy. This year, the Bank of Japan only has two monetary policy meetings left in October and December. This also means that if the Bank of Japan wants to adjust its current loose monetary policy, there will only be two opportunities left this year.
From the perspective of economic performance, the rising inflation level and the positive economic outlook are expected to provide support for the Bank of Japan's monetary policy shift. Data shows that Japan's core consumer price index (CPI), excluding fresh food, rose 3.1% year-on-year in August, slightly exceeding market expectations of 3%, and has also exceeded the Bank of Japan's 2% target for 17 consecutive months.
In addition, the latest forecast from the Bank of Japan also conveys an optimistic attitude towards the outlook for the Japanese economy. In its latest quarterly report released in October, the Bank of Japan raised its assessment of the economic situation in 6 out of 9 regions in Japan, marking the largest increase since July 2022.
The increase in expectations for economic conditions this time has to some extent demonstrated the Bank of Japan's confidence in Japan's economic recovery. And this further heats up market expectations for subsequent adjustments to monetary policy by the Bank of Japan.
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