BoJ: maintained ultra-easy policy but scrapped forward guidance

• No change on key policy short-term interest rate and limits of the Yield Curve Control programme.
• Scrapped forward guidance to maintain the interest rate at current or lower levels
• Need one and half-year to conduct a review of monetary policy guidance.
• USD/JPY and Nikkei 225 rallied; watch the 135.30 key short-term resistance on USD/JPY.

The Bank of Japan has maintained its key policy short-term policy interest rate as expected at -0.10% and kept the limits of its Yield Curve Control (YCC) program on the 10-year Japanese Government Bond (JGB) yield unchanged at 0.50% on either side of the 0% target.

Here are a couple of key highlights

BoJ removed forward guidance that pledged to keep key policy interest rates at current or lower levels and highlighted that it will need one to one and half-year to conduct a review of monetary policy guidance.

The latest BoJ quarter outlook report has indicated that the risk to inflation (price) outlook is skewed to the upside in the fiscal year 2023 but skewed to the downside later in the fiscal year 2025, inflationary expectations have moved sideways after heightening, Japan’s economy is likely to recover moderately after under pressure from past rises in raw materials.

In addition, the outlook report has mentioned that wage negotiations for the fiscal year 2023 are expected to see higher wave growth than last year, inflation (price) may deviate downward if wages do not strengthen as expected, mentioned that consumer inflation is likely to slow below 2% toward the middle of the fiscal year 2023 with Japan’s GDP output gap to turn positive around the same period.

New BoJ’s key median economic data forecasts

FY 2023 Core CPI at 1.8% year-on-year versus 1.6% previously

FY 2023 Core-Core CPI at 2.5% year-on-year versus 1.8% previously

FY 2024 Core CPI at 2.0 % year-on-year versus 1.8% previously

FY 2023 Core-Core CPI at 1.7% year-on-year versus 1.6% previously

FY 2023 Real GDP at 1.4% year-on-year versus 1.7% previously

FY 2024 Real GDP at 1.2% year-on-year versus 1.1% previously

In a nutshell, FY 2023 and 2024 inflation forecasts have been upgraded from the previous report while economic growth (real GDP) is being revised down for FY 203.

USD/JPY & Nikkei 225 moved higher ex-post BoJ decision

The USD/JPY has rallied by 1.2% (160 pips) from today’s current intraday low of 133.33 to print an intraday high of 134.94 at this time of the writing; still below a key pivotal resistance of 135.30 (click here for more details as highlighted in our previous report).

In addition, the benchmark Nikkei 225 recorded an intraday gain of 0.8% to hover at a five-day high of 28,806.

What’s in the mind of BoJ’s new governor Ueda

It seems that Ueda is trying to be a “hedger” to prevent any disruptive movement in the global financial markets that increased cross-assets volatility significantly given that there are several potential risk-off shocks such as the ongoing US debt ceiling partisan squabbles that may lead to failure to extend the debt ceiling this summer’s deadline.

The key point to note is that prior “everlasting” forward guidance of keeping BoJ’s key interest rate at a negative level has been scrapped coupled with projections upgrade on Japan’s inflation (core and core-core) for both FY 2023 and FY 2024 which suggests that Ueda may be laying down the groundwork via baby steps for monetary policy normalization.

Perhaps, a change may come after summer when the US debt ceiling fiasco may be resolved and waiting for more clarity for a pause on the Fed’s current interest rate hiking cycle.

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