Big week ahead for Kuroda and the Bank of Japan

The Bank of Japan is back in the picture this week with all eyes on the government bond market as the policy board meets next week. Some longer term investors in Japanese equities may be wondering what lies in store, as the sheen of predictability for which Japan Inc is famous begins to wear off.

It all seems to have started as the BoJ revised its yield curve control measures last month as it began to become obvious that Japan’s bond-buying program was becoming distorted. The BoJ is seeking to curb inflation in the country, which while not as excessive as that in the UK or Germany for example, has been picking up sharply over the last few months.

The big issue is whether the ‘tweak’ in the BoJ YCC policy has undermined market confidence in current BoJ policy. There is increasing speculation that thee bank, which meets on Tuesday, is going to scrap the YCC policy altogether. The Japanese government bond market has been more volatility since December’s announcement, possibly more than the BoJ might have anticipated.

Bank of Japan governor Hiruhiko Kuroda is due to step down in April, which complicates things further. It is prompting rumours that he may abandon the YCC policy to make things easier for his successor.

What is Japan’s yield curve control policy?

Yield curve control (YCC) is a monetary policy Japan has pursued for the last six years and which has led the BoJ to look out of step with other central banks in 2H 2022. Kuroda has been trying to boost Japan’s economy by keeping rates low. YCC focuses on the long-term rate by keeping the 10-year Japanese government bond yield at around 0%. To do this, the bank has recently had to start buying huge amounts of bonds, as it has set an upper yield limit of 0.25%

The BoJ has been struggling with the fact that other central banks have been aggressively raising rates to keep inflation under control. Kuroda told the Japanese parliament in November that the BoJ would change its approach if Japan can hit and maintain a 2% inflation target.

Government bond market more volatile

Since the bank tweaked the YCC last month the massive Japanese government bond market has become more volatile, and the BoJ has been forced into buying trillions of yen of more debt to keep yields under control. JGB yields have soared, as has the JPY. Meanwhile equities have fallen. Japan’s benchmark Nikkei 225 index has slumped from over 28,000 at the start of December to level off at close to 25,000. Recent trading sessions have seen a smaller rally in Japanese stocks, but all eyes will be on any policy announcements next week.

Japanese inflation hit 3.7% in November, which, while low in European terms, is still the highest the country has seen in over 40 years. Tokyo economists were telling the media this week that they are not anticipating that Kuroda will do anything too drastic.

Possibly of more interest in the short term JGB market, which is already pricing in what is anticipated to be the end of the famed negative interest rate environment for the country.

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