BoJ stocktake: As expected, a relatively dovish tightening

19 March 2024

Chris Scicluna

Given the series of evidently well-informed media reports over recent days ahead of the announcement, today’s BoJ policy decision to end negative rates and YCC was very much in line with expectations. As such, the magnitude of tightening was modest and should have a relatively minimal impact on the economic outlook. Indeed, at the margin, the statement might be considered relatively dovish. While in his press conference, Governor Ueda did not rule out a further hike this year, a clear commitment to maintain accommodative policy and an active presence in the JGB market for a while to come has facilitated a market reaction of slightly lower yields, firmer equities and a modestly weaker yen.

In particular, the BoJ’s Policy Board announced the following:

  • In terms of interest rates, the BoJ ended the -0.1% negative rate policy, which has been in place for the past eight years. It replaced the three-tier framework for bank reserve remuneration with a simple single interest rate on excess reserves set at +0.1%. And the BoJ decided to target a range of 0.0-0.1% for the uncollateralised overnight call rate, effectively representing a hike of 10bps from the status quo – an amount that should have a minimal impact on the outlook for growth and inflation. The new rate on current account balances and guideline for market operations will be effective from 21 March.

  • In terms of asset purchases, yield curve control (YCC) was ended. But the BoJ decided for the time being to continue its JGB purchases broadly in line with the recent pace, around JPY6trn per month. It also pledged to increase its JGB purchases if yields pick up rapidly. And while it will gradually reduce its purchases of commercial paper and corporate bonds, it signalled that it will only cease them altogether in about a year’s time. That might suggest that it expects to be buying JGBs for at least the coming twelve months and probably more.

  • Unlike its bond purchases, the BoJ decided to discontinue its purchases of ETFs and J-REITs, confirming the Bank’s evident determination of recent months to resist further exposing its balance sheets to those markets. It did not, however, set out what it intends to do with its stock of ETFs and J-REITs accumulated over the past decade.

  • In terms of forward guidance, given the recent extended run of above-target inflation prints, the BoJ’s overshooting commitment – whereby the Bank pledged to continue expanding the monetary base until inflation exceeded the target in a stable manner for an extended period – was dropped. But the Policy Board made clear that accommodative financial conditions would be maintained for the time being.

In his press conference, Governor Ueda provided more colour on the policy decision. Among other things, he noted that what might be considered accommodative policy will change over time depending on economic conditions. And he added that “If our price forecast clearly overshoots or, even if our median forecast is unchanged, we see a clear increase in upside risk to the price outlook, that will likely lead to a policy change.” He also suggested that it had not yet been predetermined by the Policy Board whether a slowdown in bond purchases would come before another rate hike. But he warned that the economic outlook, including for wages and consumer spending, remained uncertain and cautioned that longer-term inflation expectations remained below the BoJ’s target. For the time being, however, a baseline forecast of a further small rate hike this year – to push the interest rate on excess reserves to 0.25% - still seems sensible to us. 

Today’s baby steps towards a normalisation of monetary policy are a welcome reflection of the significant normalisation of Japanese macroeconomic conditions from the years of deflation, best illustrated by the recent run of above-target inflation prints and Friday’s bumper wage settlement data. But the neutral real interest rate in Japan probably remains in negative territory. And so, while further hikes in 2025 and an eventual discontinuation of BoJ JGB purchases cannot be ruled out, no change to monetary policy next year after only one further modest hike in 2024 might seem the more likely scenario. And rates in Japan seem bound to remain significantly below those in other major economies for the foreseeable future.

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