• A rather disappointing minor tweak to its bond yield control policy. The BoJ kept the short-term policy rate at -0.1% but increase the flexibility in its conduct of Yield Curve Control (YCC).

• An 8-1 majority 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 bank.
  
  − 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 further increase the flexibility of YCC conduct by using 1.0% as the upper bound reference for 10-year JGB yields, while it will continue with large-scale JGB purchases and make nimble responses for each maturity.
• Unanimous vote on guidelines for asset purchases
  
  − BoJ will continue to buy exchange-traded funds (upper limit: JPY12.0t) and Japan real estate investment trusts (upper limit: JPY180.0b), on an annual pace of increase on their outstanding amount.
  
  − BoJ will keep the outstanding amount of commercial paper at about JPY2.0t and maintain its previous purchasing rate of corporate bonds prior to the COVID-19 pandemic. This is to ensure that the outstanding amount of corporate bonds gradually returns to its pre-pandemic level of approximately JPY3.0t.

• Upgrades economic forecasts. The central bank has revised its 2023 growth forecast upward to 2.0% YoY (previously 1.3%), supported by the materialisation of pent-up demand. In a parallel move, the BoJ has also raised its core inflation forecasts to 2.8% for both 2023 (previously 2.5%) and 2024 (previously: 1.9%), mainly due to the lingering effects of cost increases resulting from the past rise in import prices and the recent surge in crude oil prices. The BoJ underscores that the growth forecast is susceptible to risks related to global economic activity and developments in import prices due to geopolitical factors. Furthermore, the risks associated with price forecasts are contingent on firms' wage and price-setting behaviour, as well as future developments in foreign exchange rates and commodity prices.

• BoJ's small step today hints at a potential hawkish move next year
  
  − The lack of hawkishness in the BoJ's action was attributed to the absence of conviction that the ongoing inflationary trend in Japan is sustainable. The termination of YCC and the negative interest rate policy will only occur when the BoJ is convinced that the economy is in a continuous cycle of wage hikes and price increases (long-term above 2.0%). Notably, Japan's largest labour union is planning to request a pay hike of more than 5.00% in 2024. If accepted, this development could further solidify our outlook for potential major policy adjustments by the BoJ.
  
  − USDJPY year-end forecast (139.51; 2022: 131.12): As we only expect a hawkish move by the BoJ in 1H24, the yen may continue to face pressure from the strong USD in the coming weeks. However, should the Fed's "higherfor-longer" narrative change as early as December this year due to potential disappointments in US macroeconomic readings, the yen may find support and strengthen below the 140.0 threshold vis-à-vis USD.

Source: Kenanga Research - 1 Nov 2023