Central bank

New BoJ governor, old dovishness

11 April 2023 • 5 mins read
New BoJ governor, old dovishne

Kazuo Ueda attending a Q&A session at the Upper House of the parliament in Tokyo on 27 February 2023. AFP.

  • In his first news conference, new Bank of Japan Governor Ueda signalled he would continue the dovish stance of former Governor Kuroda.
  • Investors have been expecting the BoJ to end its policy of capping 10Y bond yields as soon as the summer as Japan is experiencing firm inflation for the first time in three decades.
  • However, Ueda said it was appropriate to maintain yield curve control for now, in line with our view the BoJ will only lift its yield cap later in 2023 if inflation seems likely to stay near its 2% target.
  • In the near term, BoJ dovishness aids Japan’s equities while undermining the JPY. But the BoJ is still set to change stance over the next year keeping us long-term bulls on the currency.

In his first press conference, new Bank of Japan Governor Ueda signaled he would continue the dovish stance of former Governor Kuroda for the time being.

Inflation, Japan

Source: Bank of Singapore, Bloomberg

The BoJ has been capping 10Y government bond (JGB) yields ‘around 0%’ since 2016 to revive inflation after three decades of deflation. Ueda said: “in light of the current economic, price and financial conditions, it is appropriate to maintain the yield curve control for now.”

In contrast, investors have been expecting the BoJ to end its policy of capping yields as soon as the summer as Japan is finally experiencing firm inflation again. As the chart shows, core inflation has hit 3.5%, above the BoJ’s 2% target.

Equities & Bonds, Japan

Source: Bank of Singapore, Bloomberg

Ueda’s comments are in line with our view the new governor is unlikely to make any immediate changes to the BoJ’s yield target or to its -0.10% deposit rate. This is because Ueda agrees with Kuroda that Japan’s current bout of inflation, driven by more expensive imports such as oil, may only be transitory. Earlier this year Ueda said: “Japan’s inflation is led by cost-push factors … it will still take time to achieve sustainable inflation.”

In the near-term, BoJ dovishness benefits Japan’s equities. The chart shows the BoJ’s cap on 10Y yields has been very supportive of stocks since 2016. In contrast, keeping 10Y yields around 0% undermines the JPY as it leaves Japan’s interest rates far below the rest of the world’s. After Ueda spoke the JPY fell below 133 against the USD.

The BoJ, however, has already widened the band it allows 10Y yields to trade around 0% to +/- 50bps as inflation has picked up. If inflation continues to meet its 2% target - for example, as employers give larger wage rises - then the BoJ may let JGB yields trade in an even wider range or lift the 10Y yield cap altogether. We expect the BoJ may take such action later this year with Ueda noting: “we are starting to see positive developments around wages and if this continues, I think there is enough possibility that this would lead to a more stable 2% inflation.”

The risk of the BoJ turning less dovish thus keeps us long-term JPY bulls. We forecast a strong rally to 120 against the USD over the next 12 months.

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