BOJ open to tweaking YCC this year if wage momentum holds – sources

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TOKYO – The Bank of Japan is warming to the idea of ​​adjusting its controversial bond yield control policy later this year, but is likely to keep the settings unchanged at next week’s meeting as it awaits more evidence of sustainable wage growth, sources said.

Kazuo Ueda is presiding over his first policy meeting since becoming governor of the Bank of Japan on April 27-28, and his appointment has raised expectations that the bank will begin to resolve its very loose positions – the only question is when.

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With global recession fears overwhelming forecasts, there is no consensus within the Bank of Japan over the near term that it can end yield curve control (YCC) – a policy that sets a short-term interest rate target of -0.1% and a maximum of 0.5% on bond yields. for 10 years.

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However, five sources familiar with the BoJ’s thinking say the preferred approach, for now, is to stay the course, meaning the bank won’t make immediate big changes to the YCC and its cautious policy guidance.

“Given the looming external economic risks, it is appropriate to maintain ultra-loose monetary policy now,” said one of the sources, a view echoed by two other sources.

But the nine-member board of directors may engage in a more lively debate about the fate of the YCC at meetings June 15-16 and July 27-28.

Doves at the Bank of Japan see the need to take plenty of time to ensure Japan’s economy can weather external headwinds, and allow companies to continue raising wages next year — even if it means missing out on phasing out stimulus in the current recovery cycle, sources say.

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The Bank of Japan is aware of the risks of any premature moves that could be interpreted as a withdrawal of monetary support, as previous interest rate hikes in 2000 and 2006 drew strong political criticism as causing the recession.

“The BoJ should avoid dampening public sentiment,” said one source, sending a message that could be interpreted as an early approach to exit, a view echoed by another source.

Others at the Bank of Japan see scope to discuss an adjustment perhaps in the coming months, encouraging the big pay increases offered by big companies at annual wage talks in the spring, according to the sources.

Severe labor shortages are likely to keep companies under pressure to raise wages, even if the economy slows, according to those who see room for a policy adjustment in the near term.

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The wage dynamics in Japan appear to be changing. “It is possible that 2% inflation can be met sustainably,” said one of the sources.

A key factor that could shape the debate is the final tally of results from this year’s wage talks, due to be released in early July, which will show whether small companies have raised wages as much as their larger counterparts, they say.

They also say market developments will also be crucial in determining the timing of a policy adjustment.

As recent woes in the global banking sector make safe-haven Japanese government bonds (JGB) more attractive, the Bank of Japan is under no immediate pressure to adjust the YCC with the 10-year yield now hovering around 0.465%, well off the 0.5% ceiling.

But the sources said the central bank may consider adjusting the 10-year yield target or the provisioning range set around it if renewed upward pressure on JGB yields makes it difficult to ignore the cost of defending the cap.

With inflation exceeding 2%, markets were full of speculation Ueda would phase out or end his predecessor’s massive stimulus that combined YCC with a massive asset purchase program.

Ueda has repeatedly said that the Bank of Japan will maintain ultra-loose monetary policy, including the YCC, as a sustainable achievement of 2% inflation has not yet emerged. (Reporting by Laika Kihara; Additional reporting by Takahiko Wada; Editing by Sam Holmes)