FLJP - BoJ Governor Ueda's 'Dovish' Tilt
2023-05-03 02:15:00 ET
Summary
- The new Bank of Japan governor’s stance on policy review may be more nuanced than it seems.
- Going into last week’s Bank of Japan meeting, few observers expected a major change in monetary policy.
- The forecasts accompanying the statement showed upward revisions to core and core-core (ex-fresh food and energy) inflation for fiscal 2023 and 2024, bringing them close to or over target inflation.
By Fredrik Repton
The new Bank of Japan governor’s stance on policy review may be more nuanced than it seems.
Going into last week’s Bank of Japan meeting, few observers expected a major change in monetary policy, though markets did price in some adjustment of yield-curve control, pushing up the yen and Japanese government bond yields.
At the meeting, however, the central bank not only stood pat on yield-curve control but announced that it was going to conduct a broad review of monetary policy lasting 12 to 18 months, which subsequently weakened the yen and lowered JGB yields.
To many observers, ourselves included, the length of the review was a dovish surprise. Many had expected Governor Ueda, who just recently took charge, to announce a targeted review due at the June meeting, with the intent to support yield-curve control adjustments at the June or July meeting.
Expectations, it seems, may have been too high for Ueda’s first meeting, although some important things did happen. The BoJ removed guidance to keep rates at current or lower levels - a first step toward normalization of monetary policy.
Additionally, Ueda opened the door to policy change while the review is still ongoing. The forecasts accompanying the statement showed upward revisions to core and core-core (ex-fresh food and energy) inflation for fiscal 2023 and 2024, bringing them close to or over target inflation.
Clearly, the central bank has some work to do. Tokyo core-core inflation was reported just before the meeting at 3.8%, its highest level since 1982, while Tokyo headline inflation reaccelerated to 3.5% from 3.3% in March after peaking at 4.4% in January.
In our view, the BoJ has bought some time and optionality with its policy actions. The central bank has made enough changes to language and forecasts to be able to adjust yield-curve control before the completed review. However, the adjustment will be data-dependent and may take longer than we initially envisioned.
Assessing the delay to normalization is particularly important for investors given that being underweight JGBs is associated with negative carry for global bond portfolios unless the positions are left unhedged.
As a result, the BoJ has also discouraged speculation as to its next move. The market may yet challenge the central bank as it did in the fourth quarter, when authorities had to intervene to support the yen and widen their yield-curve control bands.
All told, we believe that the market may wait to reengage until the summer, giving Ueda what he wants: some time to reassess BoJ policies.
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BoJ Governor Ueda's 'Dovish' Tilt