Has the Bank of Japan changed its yield curve control stance? Analysts disagree

Analysts were divided over the BoJ's move after core inflation in Japan topped the BoJ's 2 per cent target for the 15th consecutive month.

Nicholas Smith, Japan strategist at CLSA, believes the BoJ has "messed up" on inflation. "They've seen the Fed say inflation is temporary and they're doing it to make themselves look like fools," he says. "They've decided to ignore that and keep forecasting 1.8 per cent inflation for the current fiscal year. Inflation has been above 2 per cent for 15 straight months."

Core inflation, which excludes the price of fresh food from headline inflation, rose 3.3 per cent in June from a year earlier, in line with economists' expectations and slightly higher than May's 3.2 per cent.Ahead of Friday's meeting, inflation data is key to the Bank of Japan's deliberations on monetary policy.

Barclays economist Tetsufumi Yamakawa said in a report,Most markets still appear to view the rise in Japanese prices as "temporary," attributing it to "cost-push.", rather than "demand pull".

But he believes that withThe recent wage negotiations (so-called "hikes") led to a sharp increase in wagesThe likelihood of sustained inflation becoming a reality is "gradually increasing". "We expect wage growth in fiscal 2024 to be smaller than in fiscal 2023, but forecast growth of about 3 per cent, consistent with the 2 per cent price stability objective," Mr. Yamakawa wrote.

Regarding the shift in stance towards yield curve control, investors will be looking for signs that the Bank of Japan is shifting its ultra-loose monetary policy stanceOr, more specifically, its "yield curve control (YCC) " policy.

Under the YCC policy, the central bank has set a short-term interest rate target of -0.1% and a 10-year government bond yield of 0.5% above and below zero, with the aim of keeping the inflation target at 2%.

However, Kazuo Ueda, governor of the Bank of Japan, hinted in a recent report that the BoJ's ultra-loose monetary policy was likely to be maintained for the time being, saying: "There is still some way to go before the central bank's 2 per cent inflation target can be achieved sustainably and steadily."

In Smith's view, it is "very likely" that the BoJ will change its stance on the YCC at its next central bank meeting this Friday。

So-called "core-to-core" inflation, which strips out the cost of fresh food and energy, "spiked" to 4.2 per cent in June, according to Mr. Smith. It was the highest since September 1981, he said, adding: "Its own measures show what they are saying is wrong."

Strategists at CLSA say the main driver of inflation is food, combined with rising electricity prices, rising wages and a weak yen. Smith notes that wages in Japan have also risen at their highest rate in 30 years this year, and he says future inflation in Japan could rise unexpectedly, driven by a continuing wage-price spiral.

"If the BoJ doesn't do anything, then the yen will break through 150 against the dollar," he said. "We know from experience that intervention doesn't work. I've seen $95 trillion worth of foreign exchange intervention since 1990, and the effect is in hours, not days."

Mr. Smith said the BoJ had been increasing its bond purchases just to maintain the YCC policy, noting that it had bought 15.8 per cent of GDP since the start of December.

Mr. Ueda has said the BoJ is hitting the limits of what it can do because it already owns a third of the bond market, adding: "Now that it owns 55 per cent of the bond market, it's starting to look like a Loitsu cartoon."

ButMr. Yamakawa believes the BoJ will not shift its monetary policy stance at its July meeting. Instead, he expects the BoJ to introduce measures to phase out the YCC at its October meetingThe next quarterly outlook report will be released at that time.

USD/JPY daily chart

At 16:16 on July 24, Beijing time, the dollar against the yen 141.52/53