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BOJ tipped to keep yield controls steady next week, sources say

By Leika Kihara and Takahiko Wada

TOKYO (Reuters) – The Bank of Japan is inclined to keep its yield control policy on hold at next week’s meeting, five sources familiar with its thinking said, as policymakers prefer to scrutinize more data to ensure wages and inflation continue to rise.

But there is still no consensus within the central bank on when it should start phasing out stimulus, which could make next week’s decision a close call.

) With inflation overshooting the BOJ’s target for more than a year, markets have been speculating that the central bank could adjust yield curve control (YCC) as early as the July 27-27 meeting.

Some market participants are betting the central bank may widen the range of reserves it sets around its yield target to curb market distortions from heavy bond buying.

With annual yields steady below the 0.5% yield cap, however, many BOJ policymakers see no immediate need for new measures to deal with YCC side effects, sources said.

They also believe that the BOJ can afford to wait until it becomes clearer whether the global economy can avoid a hard landing and allow Japanese companies to make enough profits to continue rising wages next year.

The Bank of Japan may not make any changes to its policy framework next week despite sudden moves in bonds and the yen, they said.

“Inflation has accelerated faster than expected. But the key is whether this growth is sustainable, which will largely depend on corporate profits and the outlook for wages next year,” one source said.

“YCC needs to end at some point. But now may not be the time,” said another source. “There are signs of a change in Japan’s deflationary mindset. But it’s still sentiment-driven rather than substantive.”

Even if the BOJ were to adjust, it would likely be only minor tweaks to make YCC sustainable, a third source said.

Broader inflation outlook unchanged

In new quarterly forecasts issued after the meeting, the board is likely to raise its forecast for core consumer inflation for the year starting in April, sources said.

But they said the fiscal 2025 and 2025 forecasts were likely to remain largely unchanged from current forecasts.

Based on current forecasts in April, the BOJ sees core consumer inflation at 1.8% this fiscal, accelerating to 2.0% next year before moderating to 1.6% in 2025.

Core inflation (excluding the impact of volatile fresh food and energy) is expected to be at 2.5% pa this year at 1.7%, the following year at 1.7%, 2025 at 1.8%.

Under YCC, the BOJ has guided short-term interest rates at -0.1% and 27 annual bond yields around 0% as part of efforts to reflate and sustainably achieve its 2% inflation target.

The central bank has also set a reserve band around the annual yield target, which was widened to in December, sources said, as part of an effort to address market distortions caused by massive bond purchases to defend the cap, with a basis point of 0% plus or minus.

While a hike in short-term interest rates remains elusive, the decision on whether to adjust the yield band will depend on the balance between YCC’s benefits and costs.

The market has mixed views on when the BoJ can adjust the YCC. Bank of Japan Deputy Governor Shinichi Uchida said earlier this month that the central bank is mindful of policy side effects, which also led some market participants to bet that the BOJ may raise the 0.5% cap set by one-year bond yields.

But market expectations for a July adjustment were tempered after Governor Kazuo Ueda made comments on Tuesday suggesting that the bar for tapering stimulus remains high.

“We expect the BOJ to keep key policy levers on hold next week,” said Stefan Angrick, senior economist at Moody’s (NYSE: MCO) analytics firm. “Whether the BOJ adjusts the YCC or not, a broader rate hike remains distant.”

More than three-quarters of economists polled by Reuters said they expected the BOJ to keep policy steady next week, including its yield control program.

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