BOJ discussed inflation overshoot risk in June, providing insight into July adjustment.
BOJ discussed inflation overshoot risk in June, providing insight into July adjustment.
Bank of Japan Discusses Inflation and Bond Yield Control
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The Bank of Japan (BOJ) recently released the minutes of their June policy meeting, shedding light on their decision to allow some rates to rise along with increasing prices. The discussions among the board members revealed key insights into their views on domestic inflation and the need for potential changes in their bond yield control policy.
During the meeting, one board member suggested conducting a review of the bank’s bond yield control policy “at an early stage.” However, the majority agreed that such a review was unnecessary for the time being, as the market function had improved to some extent. The minutes indicated that “many members said bond market function was improving with distortion in the shape of the yield curve fixed.” This sentiment reflected the board’s view that the yield curve control (YCC) policy did not require immediate adjustments.
It is essential to note that the discussions in June took place before the recent decision to amend the YCC policy. At the time, the BOJ opted to maintain its ultra-easy monetary policy and provide dovish guidance, reaffirming its commitment to sustain stimulus until the 2% inflation target is achieved.
However, during a subsequent meeting last week, the BOJ surprised the markets by announcing tweaks in its bond yield control policy. This change allows bond yields to rise more freely in line with increasing inflation. Nevertheless, BOJ’s deputy governor Shinichi Uchida emphasized that this adjustment did not signify an impending shift towards higher interest rates.
The notable debate during the June meeting centered around the nature of inflation in Japan. The board members discussed whether the persistently high inflation, which exceeded the 2% target for about a year, was primarily driven by temporary cost pressures or had evolved into sustainable price increases fueled by domestic demand.
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Some members believed that the inflation rate would slow down below 2% once the cost-push factors diminished. However, one member emphasized that the risk of inflation remaining elevated above the target level “remained high.” The minutes also revealed that several board members noted the rise in service prices, indicating an increasing role of domestic factors in driving Japan’s inflation.
The board recognized the significance of medium- and long-term inflation expectations in guiding the BOJ’s approach to yield curve control. This acknowledgment reflects the bank’s understanding that inflation sustainability is a critical factor in shaping their policies.
As of June, Japan’s core consumer inflation had risen by 3.3% compared to the previous year. This marked the 15th consecutive month that the inflation rate remained above the BOJ’s 2% target. The data indicated that companies continued to raise prices to offset growing raw material costs.
Overall, the minutes from the BOJ’s June policy meeting provide valuable insights into the bank’s approach to inflation and bond yield control. While the discussions did not initially suggest any imminent changes, recent developments prompted the BOJ to adjust its policy. The board recognizes the complex interplay between domestic factors and inflation sustainability, which will guide their decision-making process in the future.
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