The BoJ will conduct YCC policy with greater flexibility

Despite today’s (28th July) surprise tweak to YCC policy, we continue to believe that Governor Ueda is determined to avoid premature tightening and will spend another year or so to carefully assess whether the economy is on track to achieve 2% inflation within his five-year term.

What you will learn:

• Their aim is to enhance the sustainability of the current easing framework in a forward-looking manner. Highlighting “extremely high uncertainties” in the inflation outlook, the BoJ argues that strictly capping yields will hamper bond market functioning and increase market volatility when upside risks materialize.
• The median core-core CPI (excluding fresh food and energy) forecast in the BoJ’s Quarterly Outlook Report was revised up to 3.2% from 2.5% for FY2023. However, it remained short of the 2% target in FY2024 and FY2025 at 1.7% and 1.8%, respectively. The central bank’s risk assessment of the inflation forecast for FY2023 and FY2024 is now skewed to the upside.
• We are confident in our forecast that inflation will moderate over H2 2023 because import costs have been trending down since mid-2022. Core-core CPI appears to be gradually losing inflation momentum recently, based on three-month rates rather than the year-on-year measure.