The latest Bank of Japan monetary policy meeting and what this means for the UK
The Bank of Japan held a Monetary Policy Meeting over the 27th/28th April. This was important because it was the first meeting led by the new Governor, Kazuo Ueda. There was no change in policy at this meeting; the negative short-term policy rate of –0.1% and present yield curve control measures will stay in place. Whilst we had anticipated this would be the case, we want to highlight a few key points.
The Bank of Japan removed a key piece of forward guidance in the accompanying statement to April’s monetary policy decision. There were no changes implemented to policy rate or the yield curve control framework but, the omission of the phrase “[The Bank] expects short- and long-term policy interest rates to remain at their present or lower rates” indicates that tighter monetary policy is to come in the near future.
Why is this important?
This is important to all investors outside of Japan, and UK pension schemes in particular, as changes in the Bank of Japan’s monetary policy stance are set to have profound implications for domestic repatriation flows. As Japanese investors incrementally find their domestic market more attractive there will be a potential strengthening of the yen and reduced demand for fixed income assets in Europe and the US.
We were expecting this change of guidance. Possible market turbulence arising from a change in the Bank of Japan’s policy is one of the key risks that we have identified to market performance during the year.
Japanese inflation
Japanese inflation has remained elevated, particularly on core measures. The important Shunto wage negotiation round indicates higher than expected settlements, reinforcing the passthrough of inflation to higher wages. Growth indicators are healthy. This raises the likelihood of inflation becoming more persistent. Long-term expectations have not, however, moved upwards.
Looking ahead, we think that yield curve control will be removed in July (following the conclusion of the Shunto process).
The Bank of Japan must navigate a delicate balance between price stability and financial stability. Avoiding the risk of market dysfunction during this tricky process is a key task for the new regime under Governor Ueda.
