ANALYSIS-Sustained inflation could force BOJ to adjust monetary policy By Reuters

2023-07-14 14:51:00

© Reuters. Yen banknotes in illustration photo 09/23/2022 REUTERS/Florence Lo

Por Leika Kihara

TOKYO (Reuters) – The Bank of Japan is in a bind over rising prospects for sustained inflation, which has set the stage for an early adjustment to its yield control policy, despite central bank Governor Kazuo Ueda’s assurances that that would “patiently” maintain massive monetary stimuli.

The first test will come at the central bank’s monetary policy meeting on July 27-28, when the board is likely to revise its inflation forecasts and signal its conviction that a demand-driven price rise, supported by wage growth, is taking place. .

The Bank of Japan has been discussing the idea of ​​adjusting the yield curve control internally as early as this month, although the talks are preliminary and no final decision has been taken, two sources familiar with its thinking say.

“It is true that discussions are ongoing. But there is no clarity on what the final decision would be,” said one of the sources about the chance of a change in July.

Any adjustment will likely be a small shift to raise a defined yield target cap rather than a revision of ultra-loose monetary policy, a second source says. The sources spoke on condition of anonymity due to the sensitivity of the matter.

This fine-tuning alone would likely do little damage to Japan’s economy, with the massive pumping of money by the central bank keeping mortgage rates and corporate borrowing costs very low.

But even a small shift in Japan’s protracted ultra-loose policy could send global financial markets crashing as it symbolizes how high inflation is finally forcing the Bank of Japan to cave.

While other global central banks have aggressively raised interest rates to stem rising prices, Japan’s central bank has been an outlier, arguing that the recent jump in inflation reflects external factors such as currency prices and may not last.

Lately, however, Bank of Japan officials have been dismissing signs that inflation is increasingly being driven by improving consumer demand. If that strength can be sustained, it could justify Ueda walking away from his predecessor’s massive monetary stimulus.