The Bank of Japan (BOJ) is expected to maintain its current policy at its upcoming meeting due to a stable bond market, weak wages, and the likelihood of an early election. Governor Kazuo Ueda has consistently expressed a cautious approach before implementing significant changes to the central bank's stimulus measures.
BOJ officials believe that there is little need to adjust the central bank's control of yields as the Japanese government bond market is functioning better. Market players and economists share this sentiment, leading to a general consensus that the BOJ will keep its current stance in June. However, there are differing opinions regarding future policy, with some economists anticipating a BOJ move next month.
The functioning of the Japanese government bond market has improved, as indicated by a recent BOJ survey. Factors such as a smoother yield curve and increased liquidity influenced the BOJ's decision to raise its cap on benchmark yields in December. Despite this, yields on Japan's 10-year government debt have consistently remained below the 0.5% ceiling, allowing the BOJ to reduce its debt purchases.
Market indicators suggest that liquidity is sufficient to prevent major disruptions, reducing pressure on the BOJ to take immediate action. There are speculations that an early election may be called, leveraging the increased public support following recent events. Ueda, as the nominee for BOJ governor, may be cautious about making policy adjustments during this period. However, some economists believe that an early election would not hinder policy adjustments.
While inflation in Japan remains above 3%, wage growth is insufficient to prevent a decline in household spending power. Cash earnings have only increased by 1% compared to the previous year, indicating that the BOJ is still far from achieving its goal of sustainable wage-driven inflation.
Governor Ueda has cautioned against moving too quickly, as it poses a greater risk to securing stable inflation. Recent rate hikes by other central banks suggest that the tightening cycle is ongoing, but Ueda can afford to wait as global central banks' policies remain dependent on data. The market does not show significant speculation on an imminent policy shift in Japan.
However, there is a possibility of a rate hike this summer if inflation consistently outperforms forecasts. If the BOJ revises its inflation projections upward in July, it could provide Governor Ueda with the justification needed to make initial policy adjustments next month, potentially leading to more significant changes later on. The BOJ has not ruled out the possibility of adjusting its yield-curve control policy if necessary.
