On Wednesday, the Bank of Japan (BOJ) announced that it will maintain its yield curve control (YCC) policy and increase its inflation outlook. The decision came after a two-day meeting of the BOJ’s Policy Board.
YCC is a monetary policy tool used by central banks to influence long-term interest rates. The BOJ introduced YCC in 2016, as part of its monetary easing policy. Under YCC, the BOJ sets a target for the yield on 10-year Japanese government bonds (JGBs) and tries to keep the yield around that level by adjusting its purchases of JGBs.
The BOJ’s decision to maintain YCC comes as global central banks are facing increasing pressure to tighten monetary policy amid concerns about rising inflation. However, the BOJ has said that it will not raise its policy interest rate or reduce its asset purchases until inflation reaches its 2% target.
Friday’s decision is the first monetary policy meeting under new Governor Kazuo Ueda, who took over as the BOJ governor just three weeks ago. Ueda had earlier signaled that monetary policy in the country is expected to remain largely unchanged in the near-term.
But the BOJ slightly hiked its consumer price index inflation forecast for fiscal 2023, now expecting inflation to trend around 2.5%, higher than a January forecast of 1.5% to 2%. Inflation is then expected to trend between 1.5% and 2% in fiscal 2024 and 2025.
The bank expects a positive output gap, tighter labor market conditions, and the easing effects of government subsidies on electricity, introduced earlier this year, to push up inflation towards the end of 2023.
While the BOJ still expects CPI inflation to moderate by mid-2023, data released last week showed that nationwide core inflation remained sticky at 3.1%, well above the BOJ’s annual target of 2%.
Data released earlier on Friday also showed that inflation in Japan’s capital, Tokyo, rose more than expected in April, moving back towards 40-year highs seen earlier this year. The reading, which usually heralds a similar trend in nationwide inflation, could pressure the BOJ to tighten policy sooner this year.
Governor Ueda had also raised the possibility of altering the BOJ’s yield curve control policy later this year, especially if wages and inflation rise further. But Friday’s statement posits a largely dovish outlook for the bank.