Ausforex beware of the yen! Former Bank of Japan governor warns: Ueda Kazuo may have unexpected moves this month

Kazuo Momma, a former BoJ governor who also served as chief economist at the BoJ, said the BoJ's review board was likely to discuss whether to adjust its forward guidance and yield curve control mechanism when it meets later this month. "Japan's long-term government bond yields have risen to 0.8 per cent," Mr. Momma said in an interview. "Although the 1 per cent ceiling has not been reached, if there is more upward pressure in the future, whether the current yield ceiling is reasonable will be a topic of discussion."

Kazuo Momma, a former governor of the Bank of Japan who also served as the Bank of Japan's chief economist during his tenure, said the BoJ's review committee may discuss whether to adjust forward guidance and yield curve control (YCC) mechanisms when it meets later this month, according to the latest media reports from the United States on Friday (October 6).

"Japan's long-term bond yields have gone up to 0.8 percent," Kazuo Momma, now an executive economist at Mizuho Research & Technologies, said in an interview on Thursday. "The 1 percent cap has not been reached yet, but if there is more upward pressure in the future, whether the current yield cap is reasonable will be a topic of discussion."

The Bank of Japan substantially raised the yield ceiling on 10-year Japanese government bonds in July to counter upside inflation risks, the first surprise move by BoJ Governor Kazuo Ueda since taking office.

Mr. Momma said the BoJ could take similar action again given the recent rise in Japanese bond yields, the depreciation of the yen and persistently stronger-than-expected inflation.However, Komama also mentioned that this is not his basic forecast scenario.

As Mr. Momma spoke, the dollar was trading at about 149 against the yen, near the key psychological level of 150 and not far from its highest level in more than 30 years, as the yen's continued depreciation fuelled cost-push inflation at home and weighed on consumer spending.

Meanwhile, Japanese government bonds have come under heavy selling pressure as domestic inflation and soaring Treasury yields have prompted traders to bet on an early shift in policy by the Bank of Japan, which has ramped up bond purchases to slow the trend, but long-term yields still hit their highest level in a decade this week.

In terms of possible measures, Mr. Momma said the BoJ could raise the interest rate for its daily bond-buying operations from 1 per cent, or raise the lower limit of its target 10-year bond yield to 0.25 per cent, and raise the upper limit of the range.

"Negative rates and the YCC will not end in October because they are linked to the 2 per cent inflation target, which has not yet been achieved," Mr. Momma said. "But there is a degree of freedom to adjust policy based on long-term yields."

Mr. Momma also noted that the BoJ could also adjust its forward guidance to remove its pledge to "take additional easing measures without hesitation if necessary", a move that some economists had expected at last month's meeting.

"In the current economic conditions, the chances of any additional easing that is necessary are very slim," Mr. Momma said. "I think they can remove that phrase and there is a good chance they will consider doing so."

However, Kazuo Momma said that adjusting YCC and forward guidance is not his basic forecast for the next meeting, which ends on October 31.

After leaving the Bank of Japan in 2016, Kazuo Momama claimed that while the Bank of Japan may raise inflation expectations again in its latest outlook report, its main message will be that it is not yet confident enough to say that an inflation target is finally within reach.

He said that if the preliminary results of spring wage negotiations in March next year show continued strong wage growth, then April next year is the most likely time for the Bank of Japan to end negative interest rates, and it would be logical for the BoJ's governing council to end YCC and zero interest rates at the same time.

Half of the economists surveyed by Bloomberg expect the Bank of Japan to abandon zero interest rates sometime in the first half of 2024, with April the most likely month in their forecast.

Mr. Momma said the BoJ might need to see signs that annual wage negotiations could lead to a rise in wages this year of about 3.58 percent, which would be the biggest increase in three decades. He puts the odds of that happening at 50 percent.