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Reluctant BOJ likely to change forward guidance this year: survey

Small adjustment seen as easiest step after bank holds the line on easing, analysts say

Japan's central bank maintained an ultraloose monetary policy at its latest meeting despite a falling yen. (Photo by Karina Noka)

TOKYO -- Economists see a possibility of the Bank of Japan adjusting its stance on interest rates in the second half of 2022, a Nikkei survey shows, even as BOJ officials cling to a policy that is fueling a yen sell-off.

In a Nikkei survey of 11 economists, eight said they expected the BOJ to make some move toward a course change by the end of the year.

Japan's currency slid further against the dollar Thursday after the central bank maintained its ultraloose monetary policy while the U.S. Federal Reserve and other peers move to raise interest rates.

BOJ Gov. Haruhiko Kuroda defended the bank's assessment that a weak yen is a net plus for the Japanese economy -- despite fueling inflation -- and warned against market movements based on "speculation."

Economists said the likeliest step for the BOJ to take would be adjusting its forward guidance.

The bank now "expects short- and long-term policy interest rates to remain at their present or lower levels." A possible adjustment would be to remove the reference to "lower levels."

The move is seen as a relatively easy one for the BOJ make. But "it probably wouldn't have a significant effect," said Izuru Kato, president and chief economist at Totan Research.

Another option is a change in the BOJ's yield curve control. The BOJ now targets a yield of about 0% on 10-year Japanese government bonds, with a tolerance of 0.25 percentage point on either side, as well as a short-term yield of minus 0.1%. The bank defends these lines with bond purchases at desired interest rates.

Five out of 11 economists said the bank could switch its cap to the five-year yield, giving long rates more room to rise.

"This would help mitigate the side effects from a weak yen," said Tetsufumi Yamakawa, head of research at Barclays Securities Japan.

On the other hand, "there is a possibility that 10-year yields would surge," warned Mitsubishi UFJ Morgan Stanley Securities senior market economist Naomi Muguruma.

A third option is to expand the BOJ's tolerance range for 10-year yields to plus or minus 0.5 percentage point.

The BOJ on Thursday said it would buy unlimited amounts of 10-year Japanese government bonds at a yield of 0.25% every business day. With a wider band, the bank would need to defend its yield cap through these purchases less frequently.

"By being flexible in its interpretation of long-term yield cap out of consideration for how the market is functioning, the bank could in effect tolerate a wider band," said Mari Iwashita, chief market economist at Daiwa Securities.

One of the biggest questions is whether the BOJ will keep short rates in negative territory. The bank has signaled plans to stay the course for now, arguing that wage growth in Japan has not broadened enough to sustain higher consumer prices.

Economists generally agreed that the BOJ will not end its negative interest rate policy before the end of the year. "The domestic economy cannot withstand a rate hike," said Ryutaro Kono, chief economist at BNP Paribas Japan.

The upper house election this summer is the last big event on Japan's political calendar for a while. Speculation on a possible monetary policy adjustment is likely to heat up in its aftermath. The BOJ's ability to communicate its stance to restless markets could be tested again.

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