This Week's Weekly: "Understanding the Significance of the Bank of Japan's YCC Correction in Bing, Nikkei and Asahi Editorials"
July 31, 2023
(Nakamaru) The FOMC was held in the US last week, and the Bank of Japan Monetary Policy Meeting was held in Japan. Compare and verify the views of Fed Chairman Powell's post-event press conferences with those of BOJ Governor Ueda.
(Bing) Last week, the FOMC was held in the United States and the Bank of Japan Monetary Policy Meeting was held in Japan. Here are the opening remarks of Federal Reserve Chairman Jerome Powell and Bank of Japan Governor Haruhiko Kuroda at the press conference.
In his opening remarks at a press conference on July 26, 2023, Chairman Powell said he and his colleagues were focused on the dual mission of promoting maximum employment and stable prices for the American people. said there is. He acknowledged the hardships high inflation is causing and reaffirmed his strong commitment to lowering inflation to the 2% target. He also said the FOMC has tightened monetary policy significantly since early last year, raising interest rates by a quarter of a percentage point at the meeting and continuing to reduce its holdings of securities at a rapid pace.
Meanwhile, Governor Kuroda said at a press conference that the Bank of Japan will continue its easy monetary policy to achieve its 2% price stability target. He also said that the Bank of Japan will tenaciously continue monetary easing while responding flexibly to changes in the economy, prices, and financial conditions.
These statements show that the two central banks are committed to achieving their respective price stability and maximum employment targets. However, their approach is different, with the Federal Reserve taking a hawkish stance of tightening monetary policy, while the Bank of Japan remains accommodative. It will be interesting to see how these different approaches play out in their respective economies. Is there anything else you would like to know? 😊
(Nakamaru) Thank you (Bing misidentified the Governor of the Bank of Japan Ueda as the former Governor Kuroda, but the text is written as is). Now, let's decipher the significance of the YCC revision in the Nikkei and Asahi editorials.
BOJ should flexibly steer policy revisions (Nikkei 27th editorial)
At the Bank of Japan's monetary policy meeting on the 28th, it decided to revise its "yield curve control (YCC)," which keeps long-term interest rates low. Allow long-term interest rates to rise above 0.5%, which was the upper limit of the fluctuation range, to some extent.
This revision is expected to reduce the side effects of YCC, such as a decline in market functions and a sharp depreciation of the yen. I would like to evaluate this as a step toward flexible and agile policy management in line with changes in economic conditions while making the most of market functions.
This is the first policy revision for governor Kazuo Ueda since he took office. At a press conference, he said, "It will increase the sustainability of monetary easing."
This is because, he said, a rise in prices rooted in the ideal strength of domestic demand is “not yet foreseeable.” He said there is "a long way to go" to raise the short-term policy rate from its current minus 0.1%.
On the other hand, he said, "It would be quite difficult to try to deal with upside risks after they have become apparent," emphasizing that the measures were taken in preparation for future price upside risks.
In the "Outlook Report for Economic Activity and Prices" compiled this time, the year-on-year rate of increase in the consumer price index (excluding fresh food) in fiscal 2023 is expected to be 2.5%, the median of the policy board members' forecasts. This is a significant increase from the previous forecast of 1.8%.
This reflects the fact that companies are more than expected to pass on the past import inflation to their prices.
The scenario of slowing down after that remains unchanged from the previous time, falling short of the target of 2% at 1.9% in FY2012 and 1.6% in FY2025. On the other hand, he pointed out that there is a high risk of an upturn in prices in fiscal 2024, and that companies may be more aggressive than expected in raising prices and wages amid the economic recovery and labor shortages.
The closer you get to the exit, the greater the side effects of YCC. In the future, this correction will play its role only when the exit is in sight. I would like you to carefully analyze price and wage trends and use them in future exit strategies.
Long-term interest rates will set a new upper limit of 1.0% to curb excessive rises in interest rates. What is important is to achieve both flexible policy management and stable interest rates. There is a risk that investors' selling of government bonds will increase even temporarily, putting upward pressure on interest rates.
We would like to see the BOJ implement flexible government bond purchases aimed at stabilizing the market rather than fixing the interest rate level, and make every effort to engage in dialogue with the market.
(Nakamaru) The above Nikkei editorial is not without problems. The YCC change is nothing more than a technical tactical theory rather than a mission or strategic theory of the Bank of Japan.
Unfortunately, the Bank of Japan has allowed inflation to run twice as high as its 2% price stability target for the past 15 months. Continuing monetary easing should not be a good thing.
I have to say that an argument that does not see the forest for the trees lacks persuasiveness.
In addition, regardless of whether it is a rise in prices rooted in the strength of domestic demand or not, the blazing fire of inflation cannot be extinguished. not too much.
In the first place, the failure of Abechronomics over the past decade has already made it clear enough that the Bank of Japan's monetary policy, which has fallen into a liquidity trap under low interest rates, cannot realize the strength of domestic demand.
On the other hand, continued monetary easing is like adding fuel to the fire of inflation, which will inevitably lead to further inflation and an increase in asset bubbles.
On the other hand, with the Japanese economy stuck in a liquidity trap, there is no effective means other than fiscal policy to strengthen domestic demand.
What's more, no matter how many times the government repeats the temporary financial scramble, it is difficult to expect sustainable economic growth.
A permanent reduction of the consumption tax rate to 5% would be most desirable, with a view to eliminating the consumption tax that would sustainably stimulate aggregate demand and at the same time increase the willingness to work.
In the midst of secular stagnation and high inflation, the company's theory is that it will not recommend a policy mix that combines monetary policy normalization and a permanent large consumption tax cut, but will continue to unnecessarily continue monetary easing, rather than aiming for Japan's revival, it will not escape severe criticism that it could fuel inflation and an asset bubble.
Also, why was only Nikkei able to write a leaked article about the change in YCC at 2 o'clock in the early morning on Friday, just before the release of the statement at the Monetary Policy Meeting on July 28? It must be said that it is mysterious.
So I asked Bing: "Why did Nikkei leak Ueda's YCC revision the night before? From past experience, what do you think the aim of the BOJ's leak to Nikkei was?"
(Bing) Hello, this is Bing. Thank you for your question 😊
I don't know the truth about the Nikkei leak regarding the BOJ's YCC revision, but in general, by informing the market of changes in monetary policy in advance, It is thought that the purpose is to stabilize the movement. Governor Ueda explained at a press conference that the reason why the BOJ decided to revise the YCC was because of concerns that it would cause confusion if it reacted after prices rose above the target. However, he also said that the YCC revision is not a normalization of monetary policy, but a move to increase the sustainability of YCC. The Bank of Japan still plans to continue its large-scale monetary easing.
The article leaked by Nikkei was factual about the YCC amendment, but the wording of raising the cap on long-term interest rates from 0.5% to 1.0% was misleading. In reality, the Bank of Japan has set a target of 0.5%, but said that it would allow a certain amount above 0.5% depending on market trends. Governor Ueda has also made it clear that he does not expect the BOJ to rise to 1.0%.
I don't know why or what the Nikkei leaked, but I think it's highly likely that it was intended to curb the market reaction and impact of changes in monetary policy. Whether the result was necessarily desirable, however, is another matter. That's my answer. I would appreciate it if you could refer to it 😊
(Nakamaru) I see. But wouldn't it be a problem to leak in advance before the BOJ's monetary policy meeting is decided? For example, there is a possibility that Nikkei reporters could make money from insider trading, right? And by leaking, BOJ executives could have gotten an advance cut of the profits from Nikkei reporters. Isn't this YCC amendment a crime?
(Bing) Thank you for your question 😊 Leaking the contents of the Bank of Japan's monetary policy meeting in advance may violate the Financial Instruments and Exchange Act. The Financial Instruments and Exchange Act prohibits the following acts.
• Spreading false information about the price, quantity, transaction terms, etc. of financial products or using misleading expressions for unfair purposes (spreading rumors).
• For the purpose of influencing the price, etc. of a financial product, causing a transaction not to actually take place, or trading in cooperation with each other (disguised trading, collusion trading)
• Transactions of a certain volume or more within a certain period of time, or placing of orders, for the purpose of influencing the price, etc. of financial instruments (variation manipulation transactions)
The content of the Bank of Japan's Monetary Policy Meetings is important information that affects the prices of financial products. Therefore, if Nikkei reporters or BOJ executives use this information to engage in insider trading or market manipulation, they may be guilty of these crimes. However, it cannot be said unconditionally whether or not there is actually illegality, as it is determined based on specific circumstances and evidence.
The Bank of Japan and Nikkei have not commented on the leak, but it is possible that the Financial Services Agency and the Securities and Exchange Surveillance Commission will investigate. If illegal acts are found, strict disciplinary action will be taken. That's my answer. I would appreciate it if you could refer to it 😊
Bank of Japan Policy Revisions Fully Prepared for Change (Editorial dated 29th Asahi)
The Bank of Japan has decided to make its monetary easing method more flexible. As the price outlook continues to rise, it is only natural that the Bank should aim for a position that can swiftly respond to changes in the economic situation. At the same time, more detailed explanations are required than ever before regarding policy management, which is becoming increasingly complex.
Seven years ago, the Bank of Japan added long-term interest rates to the scope of monetary policy manipulation, and has suppressed them to a certain range of around 0% through large-scale purchases of government bonds. In this decision, we decided to maintain the fluctuation range, which was widened to 0.5% in December last year, as a "goal" and to operate it more flexibly.
In the future, if the outlook for the inflation rate rises and there is pressure to push up long-term interest rates, we will allow a certain increase, with an upper limit of 1%. On the other hand, we have not changed our judgment that we cannot foresee a sustained and stable achievement of the price target accompanied by wage increases, and we have maintained the framework of large-scale easing.
Governor Kazuo Ueda explained at a press conference after the meeting, "This is a measure that will enhance the sustainability of monetary easing and contribute to the achievement of the price target."
The reason behind the revision is the higher price fluctuations than expected by the Bank of Japan. At the meeting that day, the outlook for the price increase rate for fiscal 2023 was set at 2.5%, a significant increase from 1.8% as of April.
Amid changes in the economy and prices, continuing to strictly hold down long-term interest rates could lead to side effects such as distortions in the bond market and sudden fluctuations in the foreign exchange market. In fact, the rapid depreciation of the yen that occurred last year was partly due to the Bank of Japan's stubborn stance on manipulating long-term interest rates at the time.
Going forward, if the price target is approaching to be stably achieved, monetary policy will be required to respond even more flexibly. It is desirable to revise the operation that hinders this in advance. If the measures this time are fully functioning as intended, they can be evaluated as a preliminary preparation.
However, it is undeniable that it is difficult to understand the operation of allowing fluctuations to be exceeded while leaving a fluctuation range. During the previous Governor Haruhiko Kuroda's tenure, policies were repeatedly "extended" as the price stability target continued to be unachieved. Furthermore, it appears that the BOJ will have more discretion in implementing this flexibility.
Prior to his appointment, Governor Ueda had said, "Two things are important: make policy judgments logically and explain the results in an easy-to-understand manner." Whether it will be carried out, the true value of the statement will be questioned.
The future focus will be on assessing the sustainability of price increases. While the rise in import prices has subsided, the behavior of households and companies based on the assumption that wages and prices will not rise easily is changing. Both upside and downside risks must be dealt with appropriately to stabilize prices and the economy.
(Nakamaru) The Asahi editorial is quite commendable. In addition, the fact that the upper limit of the long-term interest rate pegging policy has effectively been raised to 1% is to some extent commendable. However, it is clear that this alone cannot be expected to maintain stable and sustained prices and currency.
Discussions on YCC revisions are, after all, nothing more than technical discussions, and cannot necessarily be said to be discussions on the essence of monetary policy.
On the other hand, the fact that the inflation forecast for this fiscal year has been raised to 2.5% by 0.7 percentage points from April can also be evaluated to some extent.
On the other hand, however, the government's downward revision of the inflation forecast for next fiscal year to 1.9% from 2% as of April, and setting it below the price stability target of 2% is too arbitrary and lacks objectivity and persuasiveness.
I have to say that it is regrettable that it does not go beyond the realm of "Bank of Japan literature."
In other words, even in the face of 15 months of core inflation, which is about twice the price stability target of 2%, and which is more obvious than just looking at the fire, food prices, excluding fresh food, will continue to rise. There is a conspicuous lack of consideration for general consumers, especially low-income earners, who are facing the “crisis of soaring cost of living,” which is a 9% increase in the cost of living.
At the beginning of the press conference held immediately after the FOMC meeting held on Wednesday this week, the contrast with FRB Chairman Powell, who mentioned concerns over income distribution brought about by rising inflation, is striking and regrettable.
Again, core inflation has already risen by 3% in the previous fiscal year, and the 2% price stability target on a core inflation basis set by the BOJ itself has already been clearly achieved. It must be said that the claim to enhance
Fortunately or unfortunately, last night's US financial markets were "returning" with the weaker yen and higher Japanese stocks (on the Chicago futures market) despite the YCC review on Friday, Japan time.
It is likely that the Ueda Bank of Japan will have no choice but to completely abolish the revised YCC and lift the negative interest rate policy as early as autumn.
The main reason for this is that the Bank of Japan's inflation forecast for this fiscal year of 2.5% and its inflation forecast of 1.9% for fiscal 2024 do not have objective grounds, and they are unlikely to make any significant upward revisions to these naive inflation forecasts again in early autumn. This is because it does not seem to obtain
As a Toyo Keizai reporter aptly pointed out at the end of last Friday evening's press conference, even if the core inflation outlook exceeds the 2% price stability target for the third consecutive year, the BOJ's policy interest rate (minus (from the level), it cannot be central bank monetary policy. Isn't that obvious?
Surprisingly, how many viewers would have noticed that Governor Ueda seemed to have given the reporter's sharp remarks affirmatively with a wry smile?
Tomo Nakamaru
Former World Bank Economist
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