● Maintained status quo and wait-and-see aproach amid “extremely high uncertainties”. The BoJ kept the short-term policy rate at -0.1%, long-term interest rate target band at 0.5%, and maintained greater flexibility in its conduct of Yield Curve Control (YCC).

● Unanimous vote on the conduct of YCC

- The short-term policy interest rate: maintained a negative interest rate of -0.1% to the PolicyRate 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% (“references”) from the target level, while it will continue to conduct YCC with greater flexibility and offer to purchase 10-year JGBs at 1.0% every business day through fixed-rate purchase operations.

● Guidelines for asset purchases (unanimous vote), on an annual pace of the amount outstanding

- BoJ will continue to buy exchange-traded funds (upper limit: JPY12.0t) and Japan real estate investment trusts (upper limit: JPY180.0b).

- The bank will purchase commercial paper (CP) and corporate bonds at a rate similar to that before the COVID-19 pandemic, with the aim of restoring their outstanding amounts to pre-pandemic levels, namely, about JPY 2.0 trillion for CP and about JPY 3.0 trillion for corporate bonds.

● The Bank anticipates a continuation of moderate recovery in Japan's growth, bolstered by the materialisation of pent-up demand, but admitted that it may face headwinds from global economic slowdown. Meanwhile, it expects inflation to decelerate as the impact of cost-push factors diminishes. Thereafter, there is a possibility of a moderate re-acceleration driven by improvement in the output gap, and increasing inflation expectations and wage growth.

● Despite BoJ's inaction, growing signs of inflation persistence may prompt a policy change in October

- BoJ's Ueda offered no clear sign of a shift in the bank's policy stance but did mentioned that the central bank could contemplate ending the YCC when inflation stabilises around the 2.0% target and is proven to be non-transitory. We believe that signs of persistent demand-driven inflation may soon emerge, as evidenced by an upward trend in service costs. This, combined with a potential increase in wage growth, may prompt the BoJ to make further adjustments to the YCC in October and potentially end its negative interest rate policy in 1H23.

- USDJPY year-end forecast (130.26; 2022: 131.12): the yen may continue to face pressure at its current level due to the BoJ's status quo and the Fed's recent hawkish pause. In 4Q23, any potential hint by the BoJ to end its ultraloose monetary policy, coupled with the possibility of the Fed pivoting to a more dovish stance due to growing headwinds, could boost the yen to trade stronger around the 130.0 level.

Source: Kenanga Research - 25 Sept 2023