Ueda Looks to Avoid Fireworks at First BOJ Meeting as Chief

New Bank of Japan Governor Kazuo Ueda is widely expected to avoid making a big splash this week at his first meeting in charge as he waits for a further settling of markets from recent financial sector jitters.

(Bloomberg) — New Bank of Japan Governor Kazuo Ueda is widely expected to avoid making a big splash this week at his first meeting in charge as he waits for a further settling of markets from recent financial sector jitters.

Ueda and his fellow board members are forecast to keep interest rate and asset purchase settings unchanged at the end of the two-day meeting Friday. 

While economists aren’t ruling out the chance of a surprise tweak to the central bank’s control of bond yields, they have pushed back their forecasts for a shift following dovish remarks from the governor. 

Reflecting the more complex economic backdrop the BOJ now faces and the possibility of an early general election, Ueda will likely opt for a cautious start that contrasts with the shock-and-awe launch of Haruhiko Kuroda’s term a decade ago, BOJ watchers say.

Officials are wary of tweaking or scrapping their control of government bond yields so soon after a global bank crisis clouded the outlook, people familiar with the matter told Bloomberg last week. That’s a view backed by a survey of economists who overwhelmingly see no change in April. 

“There is no rush for Ueda to make changes,” said Eiji Kitada, chief economist at Hamagin Research Institute. “Following the banking crisis, market players are still wondering what’s going to happen next. The BOJ wouldn’t want to risk putting more pressure on the situation.” 

Debut Message

While central bank governors sometimes use their debut meetings to send a clear message of policy regime change, Ueda, who took the helm on April 9, is not seen following the example set by Mario Draghi or Kuroda. When Ueda’s predecessor took the reins of the BOJ in 2013, he was expected to deliver the start of an all-out campaign to spur inflation.

Following Kuroda’s $11.7 trillion experiment in boosting growth and prices, Ueda inherits a heavily bloated balance sheet and an array of market distortions. Economists expect him to eventually dismantle Kuroda’s stimulus, including the central bank’s yield control, but he will need to tread carefully to avoid jolting markets as shown by the BOJ’s minor tweak in December.

“Attention will focus on whether there’s any sign of an intention to remove or adjust yield curve control at Governor Ueda’s press conference,” said Tsutomu Soma, a bond and currency trader at Monex Inc. “Of course, investors remain cautious and the market positioning reflects such cautiousness, so no change may spur some selling of the yen.”

A look at the options market shows traders are still hedging for possible yen strength after Friday’s decision, though not to the degree they were in March. Bets on a policy tweak in the bond market are far below levels seen at the beginning of the year.

Surveyed economists see the June meeting as the most likely timing for a change in ultra-easy policy.

An adjustment of guidance on future policy ranked as Ueda’s most likely first policy step, chosen by 62% of surveyed economists. The BOJ still mentions Covid-19 in a part of its forward guidance, a key reason for those expectations. Scrapping YCC and a further widening of the 10-year yield target range were also seen as likely by about a half of respondents.

Some BOJ watchers continue to flag the risk of a surprise adjustment to yield curve control at this meeting as the recent fall in global bond yields limits the likelihood of a slump in Japanese bonds if the BOJ moves. More than half of polled economists say the BOJ wouldn’t give prior warning if it scrapped YCC to avoid a massive selloff beforehand.  

“Everyone knows any tweak to YCC has to come as a surprise,” said Kazuo Momma, former BOJ executive director in charge of monetary policy. “So actually that change shouldn’t really be viewed as a surprise when it happens.” 

Responding to questions in parliament Tuesday, Ueda said continuing monetary easing with yield curve control was appropriate for now. Tightening policy at this point could result in a grave economic situation down the line, he added.

BOJ’s Ueda Signals Sticking With Stimulus Ahead of First Meeting

The new governor has flagged a need to look at the effectiveness of the central bank’s policies at some stage. Local media reports point to the possibility of the BOJ considering starting a review as early as the April meeting.

“An announcement of a policy review would exert upward pressures on bond yields even if Ueda says the need for a policy change is low,” Naomi Muguruma, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co., wrote in a research note. “What’s worrisome is that the BOJ would be forced to buy a larger amount of government bonds again to defend its 0.5% cap, hurting market functioning even further.”

Before major change can take place, the BOJ must be convinced that inflation is here to stay. Ueda said earlier this month that it’s right to conduct monetary policy by focusing on the risk of inflation weakening below 2% target at this point. 

The BOJ has insisted that lasting wage growth is needed to ensure prices continue going up. Annual spring pay talks have so far resulted in the best outcome in three decades, but in isolation that’s not likely enough to move the needle at the central bank.

If officials flag their optimism that prices will reach 2% or more in the fiscal year starting April 2025 in their forecasts, that would fan speculation of change to come. 

A gradual approach toward unwinding stimulus would instead be helpful for Prime Minister Fumio Kishida who handpicked Ueda. 

The weekend’s local election results are continuing to keep speculation simmering that Kishida might call an early national poll. Market disruption caused by a major BOJ policy shift would not be welcome during an election campaign.

“The chances for a policy adjustment at the first meeting are low,” said Ryutaro Kono, chief Japan economist at BNP Paribas SA. “That would likely cause problems for both the market and politicians.”

(Updates with Ueda’s comments Tuesday)

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