BOJ to ‘build case’ for big move in second half of 2024

BE said it is going to build a case for a big move in Latter half of 2024.

BE says the government is creating a case for a big move in the Latter half of 2024.

The Bank of Japan will gradually build a case for a major overhaul of its stimulus framework in the second-half of next year, using the results of a review to support its move, according to Bloomberg Economics.

Governor Kazuo Ueda's current yield curve control stimulus frame is unsustainable, as it distorts prices, lacks flexibility, needs big buying of government bonds and leaves the yen vulnerable to speculators, BEs Taro Kimura wrote in a report released Tuesday.

From Ueda's experience as board member who voted against a premature rate increase in the early 2000s, Kimura said, The governor is also wary of abandoned stimulus too quickly. He said he will instead use the review to support a case for ambitious change after a modest start at the helm.

We think the least-bad option for Ueda is to restore the Overnight Call Rate as the policy rate and anchor it at zero, and continue quantitative easing, Kimura said, referring to BE's baseline scenario.

The market speculation of imminent policy change at the BOJ has been simmering since last year, when global yields surged and the yen tanked to a low of more than four decades. From the moment he emerged as Prime Minister Fumio Kishida's new chief, Ueda has sought to tamp down expectations that he will speed ahead with changes.

The uncertainty over a worldwide economic slowdown and jitters in the financial sector have also relieved some of the market pressure on the BoJ to tinker with its control of yields again after a surprise move in December.

At his first policy meeting at the bank, Ueda made the bank's guidance more neutral and called for a review that may last up to 18 months. Ueda also said the central bank could act on findings from the review before it was completed.

In BE's main scenario, the BOJ would continue to buy bonds under its revamped stimulus, but it would be less susceptible to speculative attacks by removing yield or purchase targets.

If global yields continue to saturate the YCC framework, for example, by causing a fresh slide in the yen, the BOJ might consider a stop-gap policy shift at an earlier stage. In this risk scenario, theBOJ may widen the range around its yield target or shift it to five-year bonds instead of 10 years.

Kimura said that the alternative scenario that Ueda takes advantage of benign market conditions to discontinue YCC altogether over the coming months was less plausible given the damage it would impart to Ueda's clear communication strategy.

At around two-thirds of economic analysts surveyed by Bloomberg before Ueda's first meeting in April, the Bank of Japan forecast that the BoJ would tighten policy by July.

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