Macro Insights: Bank of Japan on hold – yen at the mercy of US data and risk sentiment

Kuroda’s parting message lacked sparks

The Bank of Japan kept its policy unchanged at Governor Kuroda’s last meeting of his decade-long tenure. The target band for the 10-year JGB yield was kept unchanged at around 0%, with an upper limit of 0.50% after being raised in December. The BOJ held its short-term rate at -0.1%.

Although data and recent communication had hinted at no change in monetary policy, there were some apprehensions given Kuroda is famous for giving surprises to the market. However, the outcome carried his usual dovish tone, ensuring a smooth handover to incoming Governor Kazuo Ueda who has conveyed policy continuity in his first remarks after being nominated.

Growth and inflation dynamics do not support the case for immediate policy tweaks

The BOJ still stays on the transitory camp for inflation, with today’s statement again highlighting that cheap energy and fading hit from import prices will slow inflation, although it adds that prices will pick up again due to rising wages and changing expectations. Ueda has also signalled a similar narrative, suggesting that he does not see Japan’s inflation as structural or sustainable. Recent data has also shown some softening in Tokyo CPI for February, mainly due to government subsidy measures to keep utility bills from going through the roof. Further measures from PM Kishida to ease cost of living pressures may continue to point towards easing inflation pressures, but wages are being pushed higher as well as companies announce wage hikes on political push, and the evolution of both wages and inflation will be key to watch to gauge how BOJ policy can change under the new Governor.

Meanwhile, growth momentum is weakening and the BOJ policy sounded a caution on exports and production although the overall economic assessment was left unchanged. Still, the recent downside surprises in GDP growth, household spending and wage growth continue to suggest that it will be tough for the BOJ to pare stimulus in the near future.

Market entering panic mode

While the BOJ stayed short of invoking market fears, other global developments have been pointing towards a risk of crisis. Silvergate Capital Corp.’s abrupt shutdown and SVB Financial Group’s hasty fundraising have sent the US banks and the KBW Bank Index plummeting. This together with the expectation of faster tightening from the Federal Reserve and the deepest inversion of the Treasury yield curve is invoking concerns of a deep incoming recession.