BOJ Is Wary of Yield Target Hike Even If CPI Hits 1%

  • Officials are said to see big risks in moving too early
  • Managing yields around the 0% target is seen as feasible

Bank of Japan officials would rather be late than early in raising their 10-year bond yield target from zero percent, even if consumer price gains reach 1 percent later this year, according to people familiar with the central bank’s discussions.

Officials see considerable risks in moving too quickly and are mindful of policy exits in 2000 and 2006, said the people, who asked not to be named because the talks are private. These exits were criticized for coming too soon and prolonging deflation. BOJ officials would want to first confirm that the underlying inflation trend is improving and view it as important to look beyond the impact of higher oil prices and a weaker yen, which have the potential to change quickly.

With the currency and rising energy costs showing signs of spurring inflation in Japan, economists at BNP Paribas SA and Barclays Plc are among those tipping that the BOJ will pin its 10-yield target higher later this year. JPMorgan Chase & Co. also sees the chance of a move.

The 10-year target, the BOJ’s long-term policy rate, is the current focus of attention. Changes to this could also affect the central bank’s short-term policy rate, which is now minus 0.1 percent and anchors the interest-rate curve it’s seeking to manage.

Read more: The BOJ’s yield-curve policy explained.

Governor Haruhiko Kuroda and his board gather for a two-day meeting Jan. 30-31, when they will consider any changes to policy and also provide updated forecasts for inflation and gross domestic product growth.

Some BOJ officials think the central bank could raise its outlook for economic growth after revisions to the way the government calculates GDP data. The inflation outlook may be kept unchanged or increased slightly, said the people with knowledge of the discussions.

Kuroda said in Davos, Switzerland, last week that he expects GDP growth around 1.5 percent for the fiscal year starting in April, higher than 1.3 percent the BOJ forecast three months ago. The BOJ in its November outlook projected inflation of 1.5 percent for the same period.

Core consumer prices, the BOJ’s benchmark gauge, fell 0.4 percent in November. Figures for December will be released on Jan. 27

Read more: the Bank of Japan’s quest for 2 percent inflation.

Ryutaro Kono, chief economist at BNP Paribas, wrote in a Jan. 13 report that the BOJ will probably raise the long-term policy rate in October because of an increasing divergence with U.S. yields, which could weaken the yen too much and hurt households.

BOJ officials are fairly confident they can keep the yields on 10-year Japanese government bonds around zero percent, even if CPI moves to around 1 percent. The more bonds the BOJ holds, the easier it gets for the central bank to influence the price, the people said.

The 10-year yield was about 0.045 percent at 5:30 p.m. in Tokyo on Tuesday, versus 2.408 percent for U.S. 10-year Treasuries. The yen traded at 113.30 to the dollar. It’s weakened about 13 percent from its 2016 intraday high set in June.

In 2000, the BOJ ended its zero interest rate policy even as the government publicly tried to stop it. Several months later, the central bank had to change course by introducing a quantitative easing program. The BOJ moved to exit this program in 2006, even as inflation was around zero percent, reinforcing a view that it wasn’t willing to do enough to fight deflation and opening the door for years of political criticism.

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