Chief Investment Strategist
Summary: The policy stance of Bank of Japan’s governor nominee Kazuo Ueda, became much clearer with the parliamentary hearings kicking off today. He assured continuity of the current easy monetary policy with a steadfast focus on achieving 2% inflation sustainably. However he was cognizant of the side effects of yield curve control, and flexible to responding to market pressures with tweaks as needed. This comes against market’s strong anticipation of a hawkish tilt.
The highly awaited event of the week was the parliamentary hearing of new Bank of Japan governor nominee Kazuo Ueda in the lower house. That went ahead without creating much sparks, with Ueda broadly sticking to the outgoing Governor Kuroda’s script initially, but later qualifying that with remarks that suggested he will remain flexible and open to policy normalization.
As we highlighted earlier, Ueda has been out of touch with BOJ policy making since 2005 and will likely take it slow to even consider policy normalization at some stage. His neutral comments today, coming against market’s hawkish expectations and together with the rising global yields, suggest yen could embark on a weakening trend again once we are past this volatility. Japanese equities have responded positively, and continue to look promising.
Markets have continued to believe that PM Kishida’s choice for the next BOJ governor to be someone from outside the bank or the Ministry of Finance has meant that people from within the circles didn’t want the job. This has reaffirmed the view that policy is moving towards an exit and boosted expectations that the joint statement from Ueda and the government could alter the 2% inflation goal.
That seems unlikely for now. Ueda’s comments clearly echoed Kuroda-san’s view that the current inflationary pressures in Japan are import-driven and unsustainable. While he continued to emphasise the importance of wage growth, he also said that a number of factors will be key to determine price pressures and it will take time to achieve the 2% target in a sustainable and stable manner.
As such he continued to emphasize that the key goal for the BOJ is to achieve the 2% inflation sustainably, while fiscal policy can be used to mitigate supply-side sources of inflation.
Ueda was not as closed to considering policy normalization as Kuroda. He said that it is his responsibility to ensure that normalization is carried out at the right time if the 2% inflation goal is reached. This means if inflation proves sticky, then the review of the yield curve control is now more likely that it ever was under Kuroda.
However, given Ueda’s view that inflationary pressures are currently unsustainable, normalization remains unlikely for now. Ueda still accepted that there are side effects of yield curve control, and remained open to considering policy tweaks.
Ueda stopped short of hinting at just what policy tweaks may be considered, but he remained open to considering tweaks like shortening the long-term interest rate target to 5-year or 7-year from 10-year currently, or even widening the band. This was a contrast to his comment ten days back, where he stated that gradually raising the ceiling creates waves of speculation as market participants just position for the next yield target.
While expectations of an abrupt exit may have cooled, market’s hawkish expectations can continue.
Other options to embark on policy normalization if inflation proves more than transitory will be ‘creative’. He hinted at moves such as raising interest rates on financial institutions' reserves parked with the central bank rather than selling bonds.
Markets can however expect somewhat improved communication from Ueda, both domestically but also in terms of coordination with foreign central banks which will be key if the YCC policy is abandoned at some point in the next 5 years given its massive global implications. This should reduce speculative positions and bring the safe haven status of yen back in focus.
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)