By Noriyuki Suzuki,
New Bank of Japan Governor Kazuo Ueda is keeping market expectations alive that he will slowly put the central bank on a path toward an exit from his predecessor's overreliance on unconventional monetary easing.
At Ueda's first policy-setting meeting, the BOJ decided to conduct a broad review of monetary policy over the past quarter of a century to learn its lessons and prepare for future policy maneuvers.
Ueda, the first postwar governor hailing from academia, denied the view that the review is linked to any specific policy change for now, but added the BOJ will take appropriate steps based on economic developments, even before the assessment concludes over the next 18 months or so.
BOJ watchers are drawing a contrast with Ueda's predecessor Haruhiko Kuroda, who often made surprise policy moves that jolted financial markets.
They expect a more predictable and realistic BOJ under Ueda, a former university professor well-versed in monetary policy, given his increased focus on economic data and better messaging that will make it easier for those outside of the central bank to get a picture of what the bank will do next.
"The review will give the BOJ the justification to tweak policy in the future," said Yuichi Kodama, chief economist at the Meiji Yasuda Research Institute.
"Mr. Ueda wants to make the BOJ more data-driven and better understood, knowing that his predecessor faced difficulty in communicating with the markets," Kodama said. "That said, the scrapping of the yield cap program, if it happens, may end up coming as a surprise because communicating it beforehand will be difficult."
The BOJ said it will retain monetary easing with yield curve control as long as necessary to attain its 2 percent inflation target, accompanied by wage growth.
Under the program, blamed for distorting bond markets, short-term interest rates are set at minus 0.1 percent while 10-year Japanese government bond yields are allowed to trade within a range of minus 0.5 percent and 0.5 percent.
"In the sense that we have not seen the 2 percent goal achieved, monetary easing has not been fully successful in firing up inflation," Ueda told a press conference on Friday. He noted that the central bank should be careful and maintain the right balance between the merits and side effects of the easing.
In the past, the U.S. Federal Reserve and the European Central Bank also carried out a review of their monetary policy framework. Both central banks have been raising interest rates to curb surging inflation in recent months, though banking woes have added a layer of uncertainty.
Still, the BOJ will likely remain a dovish outlier among the central banks of the Group of Seven industrialized nations raising interest rates. Based on the BOJ's fresh inflation forecasts, the core consumer price index excluding volatile fresh food items will rise 2.0 percent in fiscal 2024 but will undershoot the target in fiscal 2025.
Accelerating inflation, which hit a 41-year high of 3.0 percent in fiscal 2022, has prompted many companies to reward employees with pay hikes. The BOJ and analysts are trying to see if this will become a longer-term trend and support domestic demand.
"The U.S. and European economies may enter a recession so the BOJ cannot modify the yield curve control program or move toward policy normalization," said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
"What is striking is that the BOJ has a completely different time frame (for policy change) from what financial markets have expected. This was a surprise," Fujito added.
The past decade of unprecedented monetary easing under former BOJ chief Kuroda has exposed its limits, with over half of the outstanding government debt now owned by the central bank.
"The BOJ may look into the legitimacy of aiming for 2 percent inflation in the review," said Mari Iwashita, chief market economist at Daiwa Securities.
The International Monetary Fund has urged the BOJ to allow long-term bond yields to move more flexibly while critics underscore the need for its pledge to attain the 2 percent goal as soon as possible, enshrined in a government-BOJ accord, to be revised.
"The BOJ is not convinced that a virtuous cycle of wage growth and price hikes is working. It remains cautious and dovish while financial markets are rushing ahead (with expectations of a policy change)," Iwashita said, adding that the review may help curb such speculation in the short-term.
Japan may be at the crossroads as inflation expectations are heightening and deep-rooted perceptions that prices and wages will not rise appear to be changing.
Asked about the timing of the review, Ueda said there is a higher possibility that 2 percent inflation can be achieved.
"We should be prepared for both cases -- when it goes well and when it doesn't. That timing is now," the governor said.
(Reito Kaneko contributed to this story)
