The Bank of Japan (BoJ) is not expected to adopt any policy change at its June 19–20 meeting, amid growing pressure for the central bank to cut its policy rate, according to the latest report from ANZ Research.
The BoJ is in a difficult place, with inflation still far from its goal and both external and internal demand fragile. Its Yield Curve Control (YCC) policy framework has become counterproductive in an environment of slowing growth and falling yields.
The futility of the BoJ’s YCC monetary framework in a slowing-growth, declining-yield environment has already been highlighted. Recent months have underscored this view. Since then, US 10-year government yields have declined by nearly 50bp and JGBs are down around 10bp. This has seen JPY appreciate by around 3 percent.
Perhaps slightly less than one might have anticipated, but nonetheless a troubling development from the central bank’s perspective, as yen strength tends to dampen inflation pressures. Another troubling aspect of this curve flattening, for the BoJ, is the adverse effect it has on bank profitability, the report added.
Although the flattening in recent months is not policy related, the bank has been concerned that its YCC has been hurting bank profitability for some time. As a result of the downward pressure on yields, the BoJ has dramatically reduced the pace of its JGB purchases.
Currently it is purchasing JGBs at a pace of JPY29 trillion per year, which is well below its target of JPY80 trillion. Further slowing is likely. It’s possible, if the BoJ were to stick to its 0 percent (+/- 20bp) target for 10-year, that it could end up being a net seller of bonds (quantitative tightening).
"However, we think the BoJ would either adjust its target and/or tolerance band if global sovereign yields were to continue to grind lower," ANZ Research further commented in the report.