BoJ holds interest rate, re-defines YCC cap

As widely expected, the BOJ maintained its -0.1% target for short-term interest rates

By Ahmed Azzam | @3zzamous | 31 October 2023

  • BOJ Says 1% is now reference rate for YCC ceiling; Yen drops

  • BOJ keeps short-, long-term rate targets unchanged

  • Board revises up inflation forecasts for 2023, 2024

In a widely anticipated move, the Bank of Japan (BoJ) chose to keep its short-term interest rate unchanged at -0.1% and maintained the 10-year bond yield target of approximately 0% during its October meeting. However, this decision was not without its noteworthy shifts and nuanced adjustments.

One notable development is the central bank's subtle redefinition of the 1.0% cap as a loose "upper bound" rather than a rigid ceiling, effectively signaling a move away from the previous commitment to staunchly defend this level. This pivot comes after a significant change in the policy landscape since July, when the BoJ increased its long-term interest rate cap from 0.5% to 1%.

A pivotal aspect of the BoJ's recalibrated approach lies in its revised inflation forecasts. In its quarterly outlook report, the central bank unveiled higher expectations for inflation in fiscal year 2023 and 2024, now projecting rates of 2.8%, far surpassing its 2% target. This substantial upward revision signifies a notable shift in the BoJ's outlook, reflecting a more sanguine stance on Japan's economic prospects.

Nevertheless, the BoJ foresees a moderation in consumer price inflation to 1.7% in fiscal year 2025. This decrease is primarily attributed to the diminishing impact of elevated oil prices and the fading repercussions of past increases in import prices. Despite this anticipated deceleration in price growth, the central bank maintains a vigilant stance on its commitment to achieve its inflation target, although its methods and tools may be evolving.

In terms of Japan's broader economic landscape, the BoJ is cautiously optimistic. Policymakers believe that the nation's economy is on track for a continued moderate recovery, supported by pent-up consumer demand. However, they also emphasize the presence of downward pressure stemming from the global economic landscape, which is exhibiting signs of deceleration.

Furthermore, the BoJ's declaration that it will not hesitate to implement additional easing measures if circumstances necessitate serves as a reminder of its readiness to act decisively in the face of evolving economic dynamics.

The most significant aspect of this decision, however, is the challenge posed by the shifting global bond market dynamics. Rising global bond yields and the persistent specter of inflation have placed the BoJ in a precarious position, making it increasingly challenging to sustain its contentious bond yield control policy.

The BoJ has, to some extent, shown its hand by signaling its readiness to purchase bonds near the 1% level. This move is not, however, an open-ended commitment, as the central bank's approach appears to be gradually dismantling the Yield Curve Control (YCC) framework.