The Bank of Japan (BOJ) is anticipated to keep its policy unchanged at the upcoming meeting, primarily driven by factors such as a less-distorted bond market and ongoing wage weakness. Governor Kazuo Ueda has consistently emphasized the need for patience before implementing any significant changes to the central bank’s stimulus measures.
According to Bloomberg, sources familiar with the matter reported that BOJ officials perceive no immediate need to alter the central bank’s control of yields, given the improved functioning of the Japanese government bond market. This sentiment aligns with the prevailing consensus among market participants and economists that the BOJ will maintain its stance in June, although opinions begin to diverge on the future trajectory of monetary policy. A survey conducted by Bloomberg revealed that one-third of economists expect the BOJ to make a move next month.
Several analysts remarked that the central bank is likely to delay any policy changes until later this year or even longer, as there is currently no sense of urgency in the market. Recent surveys conducted by the BOJ indicated improved market functioning in the Japanese Government Bond (JGB) market since hitting a record low in February. As a matter of fact, yields on Japan’s 10-year government debt have consistently remained below the 0.5% ceiling since March. Consequently, the BOJ reduced its debt purchases to ¥7.4 trillion ($53.1 billion) last month, down from a record ¥23.7 trillion in January.
From an economic standpoint, inflation in Japan rose 3.5% YoY in April, but wage growth continues to lack the necessary strength to halt the decline in household spending power in real terms. The latest data indicates that cash earnings rose by a mere 1% YoY in April and declined by 3% in real terms over the same period. These figures suggest that the BOJ still has a considerable distance to go before achieving its goal of sustainable wage-driven inflation.
Bottom line: The upcoming BOJ meeting will be closely watched as market participants and economists analyze any subtle shifts in the central bank’s language and assess the potential implications for future policy decisions. The recent stability of the bond market and on going wage weakness suggest that there is no urgency to change framework this week.