On Tuesday, the Japanese yen weakened against the US dollar after the new Governor of the Bank of Japan (BoJ) indicated a cautious stance towards monetary policy tightening, ahead of the central bank’s meeting on Friday.
The new BoJ Governor Kazuo Ueda is anticipated to continue the expansionary monetary policy to support increasingly higher inflation. Speaking in Parliament, Ueda said it was appropriate to continue with easing yield curve control (YCC).
Additionally, the Japanese Cabinet Office published its monthly economic report which showed that the economy was on its way to moderate recovery.
BOJ’s monetary easing to continue
The Japanese currency came under pressure after Bank of Japan governor Kazuo Ueda stressed the importance of maintaining monetary easing.
While speaking in the Japanese parliament on Tuesday, the new Governor Kazuo Ueda said, “trend inflation remains below 2% but gradually accelerating, which is partly due to the effect of monetary easing.”
He explained that monetary policy takes time to impact the economy, with monetary policy steps taken now to affect prices half-year, 1 year, 1.5 years later. While tightening monetary policy now could lower inflation, inflationary pressures could also slow down on the dissipating effect of import costs.
He added that if inflationary pressures are elevated, monetary policy will be normalised. At the moment, the bank expects the risk of inflation coming below forecast to be bigger than the risk of higher-than-expected inflation, and for this reason the BoJ must maintain its easy policy now.
Ueda is widely expected to continue with the BoJ’s current ultra-easy yield curve control (YCC) policy. After taking over from Haruhiko Kuroda earlier this month, Ueda calmed markets by saying that any potential policy changes will happen slowly.
BoJ’s ultra-low policy
Since the early 2000s, BoJ’s low-interest policy was aimed at boosting economic growth and maintaining price stability. Recently, the bank’s additional measures, including Quantitative Easing and yield curve control, were an attempt to stimulate the economy by keeping long-term interest rates close to zero.
What to expect from Friday’s BoJ announcement
Analysts at TD Securities (TDS) have commented on their expectations ahead of Friday’s Bank of Japan (BoJ) monetary policy announcement. Since, this will be the first decision under the new Governor Kazuo Ueda, all market participants will closely watch for any changes to the bank’s policy.
The analysts anticipate the BoJ to maintain its policy while announcing a formal policy review with the next YCC change to come as early as June. They noted that expecting an earlier YCC change and raising the yield cap to 1% is an appealing move.
They added that the BoJ will possibly proceed with a YCC change when it is least expected without providing any advance warning. The analysts clarified that the BoJ would possibly choose to make a shift when the Fed has completed its tightening cycle as there will be less upward pressure to push global yields higher.
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