Bank of Japan Implements Flexible Yield Curve Control to Sustain Monetary Easing Amid Economic Uncertainty and Inflation Targets

The Bank of Japan held a press conference on July 28, 2023, lasting about 60 minutes. During the conference, the decisions made and the outlook report were explained.

Regarding the decision of the meeting, the Bank of Japan unanimously agreed to maintain the current levels for the short-term policy interest rate at -0.1% and the target for the 10-year government bond yield at around 0%. This decision is part of the Yield Curve Control (YCC) framework, which aims to sustain a 2% inflation target with stability and continuity. The bank also decided to introduce greater flexibility in the YCC’s operation with a majority vote.

The outlook for Japan’s inflation situation indicates that the sustainable and stable achievement of the 2% inflation target, accompanied by wage increases, has not been foreseen. Therefore, the Bank of Japan considers it necessary to continue the persistent monetary easing under the YCC. Given the high uncertainty surrounding economic and price developments, the decision to increase flexibility in YCC operations aims to enhance the sustainability of monetary easing and respond to both upside and downside risks.

In addition to the YCC decision, the Bank of Japan unanimously agreed to maintain the current asset purchase policy. However, one committee member, Mr. Nakamura, expressed support for the flexible operation of the YCC but opposed the decision, suggesting that it would be preferable to act after confirming improvements in companies’ earning power through corporate statistics.

The Bank of Japan also released an outlook report. The current economic situation in Japan was assessed to be in a gradual recovery phase, supported by pent-up demand despite the slowdown in the pace of global economic recovery. Looking ahead, as the positive cycle from income to expenditure strengthens gradually, the country is expected to continue experiencing growth surpassing its potential growth rate.

Regarding prices, excluding fresh food, the year-on-year growth rate of consumer prices has reduced its upward momentum compared to before due to the downward pressure from the government’s economic measures affecting energy prices. However, with the diminishing impact of past import price increases, the inflation rate is currently in the low 3% range. Looking ahead, it is expected that the upward pressure on prices will reduce, and after a period of narrowing, the macroeconomic supply-demand gap will improve, leading to a gradual increase in long-term expected price growth rates and wage growth rates. Wage increases have already been observed, particularly during the spring labor-management negotiations this year, which exceeded expectations.

Amidst the high uncertainty surrounding Japan’s economic and price developments, the Bank of Japan’s flexible operation of YCC aims to achieve the 2% inflation target sustainably and steadily by responding promptly to both upside and downside risks. The specific measures include maintaining the target for the 10-year government bond yield at around 0%, but with greater flexibility to move beyond ±0.5% depending on market conditions. However, to prevent long-term interest rates from exceeding 1%, continuous open market operations will be conducted to cap interest rate increases.

The Bank of Japan’s basic policy direction is to continue its quantitative and qualitative monetary easing with yield curve control, remaining responsive to economic, price, and financial conditions while persistently maintaining accommodative monetary policy to achieve the 2% inflation target. The bank will also take additional monetary easing measures promptly if necessary to support stable financing and stability in financial markets.

Overall, the Bank of Japan’s decision to introduce greater flexibility in YCC operations is driven by the need to maintain monetary easing amid high uncertainty, aiming for sustainable economic growth and the realization of the 2% inflation target with wage increases.