The Bank of Japan (BOJ) may be compelled to expedite the phase-out of its long-standing stimulus measures before the year’s end due to concerns over a weak yen and the potential of inflation exceeding expectations, according to former BOJ official Hiromi Yamaoka. Yamaoka shared these insights with Reuters on Wednesday, highlighting the mounting pressure on the central bank to normalize its monetary policies amid rising inflation.
In response to these challenges, the BOJ took a noteworthy step on Tuesday by adjusting its controversial bond yield control policy, which had a significant impact on the value of the yen. This move, coupled with dovish comments from Governor Kazuo Ueda, defied market expectations for more assertive actions toward an exit strategy.
The BOJ’s yield curve control (YCC) policy, which has anchored the 10-year bond yield at approximately 0%, is a particularly intricate policy to unwind. Ending this program abruptly could trigger substantial losses for bondholders, as pointed out by Yamaoka.
Yamaoka, who has a wealth of experience overseeing the BOJ’s market operations and maintains close connections with current policymakers, emphasized the need for a cautious approach to ensure a soft landing. He suggested that the BOJ might prefer a gradual exit strategy.
Yamaoka’s tenure at the BOJ preceded the extensive easing measures initiated in 2013 under former governor Haruhiko Kuroda. He pointed out that the central bank’s cautious language and its focus on wage negotiations in the upcoming year might give the impression that an exit from ultra-easy policy is not anticipated until around spring 2024. However, Yamaoka warned that the situation regarding inflation could change dramatically, necessitating a more prompt response.
The weakening yen may further intensify the pressure on the BOJ to exit ultra-low interest rates sooner than it initially intended, according to Yamaoka. He noted that time is running out for the BOJ, and Governor Ueda is likely aware of this. Yamaoka did not rule out the possibility of the BOJ taking action by year-end.
As part of its efforts to boost inflation to a 2% target, the BOJ has maintained the 10-year bond yield at or near zero since 2016 under YCC. It has also applied a 0.1% charge on excess reserves held with the central bank under its negative rate policy.
With inflation surpassing the 2% target for over a year, many market participants are speculating about the end of YCC and negative rates in the coming year. However, Ueda remains cautious, asserting that the BOJ must wait for more concrete evidence of sustained inflation supported by robust demand.
Yamaoka stressed that the BOJ must phase out negative rates in the near future, as the costs of this policy, such as substantial yen depreciation, are beginning to outweigh the benefits. While the BOJ is likely to continue relaxing its control on long-term rates, Yamaoka believes that YCC will not be completely removed, as this would cause significant disruption in a country accustomed to years of near-zero borrowing costs.
In conclusion, Yamaoka anticipates that the fate of negative rates and YCC will be debated as a comprehensive package, as these policies constitute the broader stimulus program of the BOJ. He emphasized that navigating a successful exit from these policies is a challenging but necessary task for the central bank.
