📝 We Now Expect BoJ to Adjust Policy In January: MUFG Strategy

We have moved up the expected timing of policy changes to January from April. That said, revising or dismantling YCC will come with its own special difficulties, and the central bank will need to proceed carefully in an environment conducive to rising interest rates. It was noted in the minutes to the July meeting that "the market environment was currently stable, and therefore it was an appropriate time to allow greater flexibility in the conduct of yield curve control." If the 10-year JGB yield were exhibiting substantial volatility, we think the Bank would refrain from winding down YCC at the January meeting even if it had all the information and data needed for a decision.

The risk of a continued decline in the yen may also encourage the BoJ to move ahead with policy revisions. The Bank cited volatility in exchange rates and other financial markets as one reason why it adopted a more flexible approach to YCC at the July meeting. Although nominal interest rate differentials are not the only factor determining exchange rates, the size of the spread between US and Japanese interest rates has almost certainly reassured dollar buyers and yen sellers (Graph5). The cheap yen is a positive for exporter earnings but also increases outflows of domestic income via the rising cost of imports (Graph 6). Price stability is the central goal of monetary policy, and it can be upset by excessive fluctuations in exchange rates. We suspect the government and the BoJ are no longer able to ignore that risk

- MUFG Strategy