• A non-market mover. As widely expected, the Bank of Japan (BoJ) revealed no hawkish surprises. Both short and long-term policy rates are kept unchanged.

• Unanimous vote on the conduct of Yield Curve Control (YCC)
  
  − The short-term policy interest rate: maintained its negative interest rate policy (NIRP) at -0.1% to the Policy-Rate 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 regard 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 purchase 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.
  
  − The bank will purchase commercial paper (CP) and corporate bonds at a rate similar to before the COVID-19 pandemic, with the objective of restoring their outstanding amounts to pre-pandemic levels — approximately JPY 2.0 trillion for CP and about JPY 3.0 trillion for corporate bonds.

• Maintained its stance on growth and inflation. The bank project a sustained moderate recovery in Japan's economic landscape, poised to be reinforced by the realisation of pent-up demand. However, the BoJ acknowledges the potential challenges posed by a global economic slowdown. Meanwhile, it foresees core inflation surpassing the 2.0% mark throughout fiscal 2024 due to the pass-through effect of cost increases stemming from prior rises in import prices. In fiscal 2025, a deceleration in inflation is anticipated due to the gradual dissipation of these factors. In the latter part of the forecast period, there exists the prospect of a moderate resurgence in inflation as the output gap turns positive and wage growth gains momentum. This could contribute to the realisation of the BoJ's 2.0% inflation target.

• BoJ to maintain a data-dependent approach and exit its ultra-loose policy once sustainable inflation is in sight
  
  − The dissipation of cost-push pressures, as evidenced by Tokyo's core inflation reading falling below expectations, coupled with persistent dovish remarks from BoJ's Ueda, may temper market expectations for a swifter transition from NIRP in 2024. Additionally, the market is anticipating a decrease in Japan's core CPI reading to around 2.5% YoY in November (Oct: 2.9%). However, discernible signals of demand-driven inflation, heightened by the anticipation of wage hikes in 2024, may prompt the BoJ to potentially terminate the YCC as early as January. Also, the BoJ may start to prime the market in January on their intention to move away from NIRP.
  
  − USDJPY year-end forecast (139.51; 2022: 131.12): The weakening of the yen near the 144.0/USD level post-BoJ meeting is seen as a momentary market knee-jerk reaction, and the downtrend is expected to be short-lived. Given the increasing likelihood that the BoJ may terminate the YCC in 1Q24 and start to drop hints on exiting sub-zero rates, the yen may recoup back the losses and strengthen marginally below the 140.0 threshold by end-2023.

Source: Kenanga Research - 20 Dec 2023