BOJ risks tying its own hands – Nomura

Expectations and speculation surrounding the BOJ's next change in policy persist even after the decision by the Policy Board on 31 July to modify monetary policy, according to analysts at Nomura.

Key Quotes

“For the time being, we think the BOJ has very limited scope to tolerate further increases in market interest rates and especially long-term interest rates (ie, mainly the yield on 10- year JGBs).”

“They key point is that the BOJ adopted forward guidance having revised down its inflation forecast based on a detailed analysis of lower-than-expected wage growth and inflation.”

“Our own view is that weak inflation will continue for longer than the BOJ is forecasting, and we think that the central bank's adoption of explicit forward guidance could tie its own hands when it comes to its next move in terms of revising monetary policy.”

“In our view the BOJ's concerns over yen appreciation were the reason why it was prepared to take the risk of tying its own hands to modify monetary policy by adopting explicit forward guidance.”

“While forward guidance remains in force, we think that any additional revisions to monetary policy will be confined to measures that allow long-term interest rates to move in a slightly broader range.”

“If the next step in normalizing the BOJ's monetary policy is to raise the target for the yield on 10-year JGBs, we think the increase is likely to be the same as that for the short-term policy interest rate: namely, 0.25ppt.”

“Therefore, we cannot see the BOJ increasing the range in which it permits long-term interest rates to fluctuate to more than ±0.25ppt versus the guidance target of around 0%.”