BOJ cautious about YCC reforms

Bank of Japan officials are hesitant to change or abandon their yield control stimulus at their policy meeting next week, given the recent overseas banking crisis that has cast a shadow on the outlook. The officials believe that it is important to maintain the cap on government bond yields for now in order to support the economy and achieve their stable inflation target. The meeting, which is the first under Governor Kazuo Ueda, is scheduled to end on April 28.

The officials intend to make the final policy decision after analyzing economic data and the latest developments in financial markets, said people familiar with the matter. They view the collapse of banks in the US and Europe as adding uncertainty to the economy. However, the banking crisis and the easing of global upward yield pressure have helped smooth Japan’s bond yield curve, suggesting that there is little immediate need to address the side effects of the yield curve control programme.

Japanese bond futures inched higher on the news. However, some traders had taken positions to bet on a policy tweak and may now need to unwind their positions, said Daisuke Uno, Chief Strategist at Sumitomo Mitsui Banking Corp. Ueda has indicated that he is in no hurry to make major policy changes since being appointed to lead the central bank. Nonetheless, some traders remain wary of the risk of another surprise by the bank.

The officials are expected to discuss whether the BOJ needs to modify the phrasing of its policy guidance during this meeting or if it can wait until later. The existing guidance mentions Covid-19, which appears to be a less important risk to the economy now, according to sources. Even if the guidance is altered, the bank plans to signal its commitment to maintaining an easy policy.