The Bank of Japan will hold its next policy decision meeting later this month. The Bank of Japan’s policy options are quite limited, which puts the central bank in a difficult situation. Inflation has been above target for more than a year with no clear signs of slowing, especially in core inflation. Meanwhile, both supply and demand inflation pressures are likely to rise further in the coming months.
The weak yen is likely to put further pressure on prices of imported goods along with the recent rise in global commodity prices, while strong tourism should also push up prices for private services. Surveys and other activity data showed a fairly strong recovery in services, which should remain the case in the second half of the year despite global headwinds.
However, the long-awaited wage growth remains rather lackluster so far. As a result, the possibility of the Bank of Japan raising rates will be off the table for quite some time. However, the long-term rally narrative seen in the US pushed the 10-year JGB yields up to the 0.8% level, immediately raising concerns at the Bank of Japan. We believe you should respond to the recent market move with another yield curve control (YCC) policy change, and perhaps even consider the option of eliminating the policy. We believe that changes in forward guidance could be a good way to communicate your future policy actions with the market.