Goldman Sachs says the Bank of Japan may start tightening, but others disagree

In this photo illustration, Bank of Japan (BOJ) logo is seen on a smartphone screen.

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After the Bank of Japan surprisingly widened its target range for Japanese government bond yields, economists at Goldman Sachs said the central bank could belatedly join its global peers by shifting to a tightening policy.

In a Tuesday note led by chief Japan economist Naohiko Baba, the firm said, “BOJ’s greater emphasis on the need to enhance the JGB market functioning suggests to us an increased likelihood that it will abandon the negative interest rate policy.”

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The BOJ’s monetary meeting concluded Tuesday with no change to its current ultra-low interest rate at -0.1%, a stance it’s held since 2016.

The Goldman economists said eliminating this negative interest rate policy “may be seen as the desirable next step, especially from a feasibility standpoint,” adding that the current stance has placed a burden on financial institutions.

Following the BOJ announcement, shares of banks listed in Japan rose for two consecutive sessions, bucking the trend of the wider index which saw another day of losses in Wednesday’s session.

Mitsubishi UFJ Financial Group, or MUFG, rose more than 8% in Japan’s morning session on Wednesday after jumping more than 9% the previous day. Sumitomo Mitsui Financial Group also rose more than 6% and Mizuho Financial Group also gained more than 4%.

We believe today’s surprising decision could be regarded as a gift for the new leadership, which may pursue chances to start more legitimate policy normalization.

Masamichi Adachi

UBS Japan economist

Different motivation

Economists at Nomura disagreed and said the move to modify the yield curve control band does not necessarily indicate a change in the BOJ’s monetary policy direction.

Analyst Kyohei Morita emphasized the initial setting of the yield curve control policy of 25 basis points on either side of the 0% target for JGB yields was based on their impact on fixed business investment, or “fundamentals.”

“By contrast, the new fluctuation range of around ±0.5ppt is based on considerations other than fundamentals – in other words, the side effects of the YCC policy,” he said.

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“Given that the motivation for the change was not based on fundamentals and the policy interest rate target was left unchanged, we do not think this move by the BOJ should be interpreted as a shift in the direction of policy toward tightening,” he said in the note.

Morita said the firm expects the Bank of Japan’s policy rate to remain unchanged in 2023.

Oxford Economics agreed that the move by the BOJ is unlikely to mark a hawkish pivot.

“We think that it should not be interpreted as a beginning of the tightening process reflecting an achievement of inflation targeting,” it said in a note, pointing to BOJ Governor Haruhiko Kuroda’s comments denying that the decision was a rate hike.

“The governor also emphasized that he still believes that elevated inflation will prove temporary. We share this view and believe that inflation rate will start to decline since H2 2023,” it said.

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Gift for incoming governor

Economists at UBS called Kuroda’s latest move a “gift” for the incoming governor of the central bank to pave way for a shift after Kuroda’s term expires in April.

“We believe today’s surprising decision could be regarded as a gift for the new leadership, which may pursue chances to start more legitimate policy normalization,” UBS Global Research Japan economist Masamichi Adachi said in a note.

While the firm had previously expected to see amendments in the BOJ’s policy rate in the middle of 2023, he added he “will not be surprised” if a change is seen as early as January or March.

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