● Surprisingly, the Bank of Japan (BoJ) decided to adjust the conduct of yield curve control (YCC) by expanding the target band for the long-term interest rate by 25 basis points (bps) to 0.5%. However, the BoJ reiterate its pledge that it “will not hesitate to take additional easing measures if necessary, and also expects short- and long-term policy interest rates to remain at their present or lower levels.”

● YCC (unanimous vote)

- The short-term policy interest rate: maintained a negative interest rate of -0.1% to the Policy-Rate Balances in current accounts held by financial institutions at the BoJ.

- The long-term interest rate: to purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit to keep the 10-year JGB yields at around 0.0%.

▪ To implement the above guideline for market operations, the BoJ will (1) widen the range of the 10-year JGB yield fluctuations to +/- 0.50% from +/- 0.25% previously and (2) increase the amount of monthly JGB purchases to JPY9.0t from JPY7.3t.

● Guidelines for asset purchases (unanimous vote)

- BoJ will purchase exchange-traded funds and Japan real estate investment trusts with upper limits of about JPY12.0t and about JPY180.0b, respectively, on annual paces of increase in their amounts outstanding.

- BoJ will purchase commercial paper (CP) and corporate bonds at about the same pace as prior to the COVID-19 pandemic, so that their amounts outstanding will gradually return to pre-pandemic levels, namely, about JPY2.0t for CP and about JPY3.0t for corporate bonds.

● To continue with quantitative and qualitative monetary easing with YCC. BoJ will continue to expand its monetary base to ensure the core inflation to stay above the 2.0% YoY target in a stable manner.

● May end the negative interest rate policy as soon as 2Q23 to curb rising inflation expectations

- Despite Governor Haruhiko Kuroda’s dovish comment saying that “today's steps are absolutely not aimed at tightening monetary policy,” we believe that his decision to modify the yield curve control is a precursor for policy normalisation. Therefore, after Kuroda steps down in April 2023, we reckon that his successor may further alter the BoJ yield curve control policy and finally increase the deposit facility rate by 20 bps to 0.1%, potentially in June, in an effort to control rising prices amid a potential rise in wage growth after the spring wage negotiations.

- USDJPY year-end forecast (130.64; 2021: 115.08): due to the BoJ’s surprise move, the yen strengthened to near the 132.0 level against the USD, appreciating by almost 3.0% from yesterday’s closing. Moving forward, the central bank’s potential move away from its ultra-loose monetary policy stance may continue to provide a boost for the yen. Hence, we have revised our end-2022 and end-2023 USDJPY's forecast to 130.64 (from: 138.74) and 117.04 (from: 136.50) respectively.

Source: Kenanga Research - 21 Dec 2022