● Policy status quo maintained. The Bank of Japan (BoJ) maintained the short-term policy rate at -0.1%, long-term interest rate target band at 0.5%, and reaffirmed its commitment to take additional easing measures if required. The BoJ also expects shortand long-term policy interest rates to remain at their present or lower levels.

● Unanimous vote on Yield Curve Control (YCC)

- 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 continue to allow 10-year JGB yields to fluctuate in the range of around +/- 0.50% from the target level and will offer to purchase 10-year JGBs at 0.5% every business day through fixed-rate purchase operations.

● Guidelines for asset purchases (unanimous vote)

- BoJ will continue to buy exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) on annual paces of increase in their amounts outstanding. The upper limit for ETFs is about JPY12.0t, while that for J-REITs is about JPY180.0b.

- BoJ will purchase commercial paper (CP) and corporate bonds at a rate similar to that before the COVID-19 outbreak, aiming to restore their outstanding amounts to pre-pandemic levels, namely, about JPY2.0t for CP and about JPY3.0t for corporate bonds.

● The Bank anticipates a recovery in Japan's growth, but admitted that it may face headwinds from high commodity prices and global economic slowdown. Meanwhile, it expects inflation to decelerate in the middle of fiscal 2023 but may re-accelerate moderately amid an improvement in the output gap and rising inflation expectations and wage growth.

● Incoming BoJ governor, Kazuo Ueda may take a wait-and-see approach on negative rates until demand-driven inflation materialised

- We expect Ueda to maintain the ultra-dovish stance of his predecessor, Kuroda, at the upcoming BoJ policy meeting and is likely to keep a close eye on inflation expectations and wage growth before making any significant policy adjustments. If clear signs of demand-pull inflation emerge, we reckon that Ueda may adjust his views and potentially end the YCC and negative interest rate policy as early as 2H23.

- USDJPY year-end forecast (117.04; 2022: 131.12): the yen may continue to face depreciatory pressure and trade above the 135.0 level in the next few weeks as the Fed is likely to continue hiking rates and maintain its "higher-for-longer" stance. However, any indications of persistent inflationary pressure, especially on the demand side, may benefit the yen, as it may signal the end of Japan's ultra-loose monetary policy.

Source: Kenanga Research - 13 Mar 2023