BOJ chief Ueda faces communication test at debut policy meeting

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TOKYO – Japan’s new central bank governor Kazuo Ueda will see his communication skills put to the test in his first policy meeting on Friday, as markets search for clues about how close the country’s ultra-low interest rates are to ending.

At the meeting chaired by Ueda just three weeks into his term, the Bank of Japan (BOJ) is widely expected to maintain its short-term interest rate target at -0.1% and pledge to guide the 10-year bond yield around zero.

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Analysts also see the central bank maintaining pessimistic guidance that pledges to keep interest rates at “current or lower levels” to ensure Japan sustainably reaches its 2% inflation target coupled with strong wage growth.

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But mounting signs of widening inflationary pressures may cast doubt on the BoJ’s argument that recent cost-driven price pressures will soon fade.

Data on Friday showed that Japan’s core consumer inflation came in at 3.5% in April, beating expectations and missing the Bank of Japan’s 2% target, while the fuel cost stripping index rose at the fastest pace in four decades.

In his post-meeting press conference, Ueda will likely reiterate the need to keep monetary policy very loose until there is more evidence that sustainable wage growth will push trend inflation toward the BoJ’s 2% target.

Analysts say global recession fears are clouding the outlook for Japan’s export-dependent economy, giving the Bank of Japan another reason to be slow in phasing out massive stimulus.

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“The Bank of Japan is concerned about the slowdown in the economy and believes that maintaining ultra-loose monetary policy is essential to encourage economic activity,” said Katsutoshi Inadomi, chief strategist at SuMi Trust.

Much revolves around how the Bank of Japan will manage the eventual transition away from the loose politics of former Governor Haruhiko Kuroda, as global investors worry that rising Japanese interest rates could lead to capital flight and reshape financial markets in ways they are not prepared for.

The key to an orderly transition is Ueda’s ability to communicate his political intentions clearly without boggling the markets.

With inflation exceeding 3% and the cost of living looking stubbornly high, Ueda may struggle to convince markets that a YCC adjustment is not imminent.

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The Bank of Japan’s staunch defense of an implied 0.5% ceiling set for 10-year bond yields has drawn criticism for distorting the shape of the yield curve and draining bond market liquidity, raising expectations that Ueda will soon abandon the YCC.

The IMF has urged the Bank of Japan to allow long-term yields to move more loosely around its target through an amendment to the YCC, to make future exits from easy policy smoother.

Despite Ueda’s reassurances to keep the YCC intact, some market players are preparing for another surprise move after being caught off guard by its predecessor’s surprise decision in December to raise the yield cap to 0.5% from 0.25%.

Aside from Ueda’s comments, hints about the policy outlook could come from the Bank of Japan’s new quarterly growth and inflation forecast due Friday, which will for the first time include forecasts stretching through fiscal 2025.

Analysts say the new estimates will indicate how the Bank of Japan sees the balance between headwinds from slowing growth abroad and recent signs of expanding wage growth.

Under current forecasts made in January, the Bank of Japan expects core consumer inflation to reach 1.6% this year and 1.8% in fiscal 2024. It expects the economy to expand 1.7% this fiscal year before slowing to 1.1% the following year.

Many analysts expect the BoJ to expect inflation to hover near the bank’s 2% target for fiscal years 2024 and 2025, but remain slightly below that.