BOJ raised yield cap due to market calm, likely wage growth: minutes

Bank of Japan board members viewed it as "appropriate" to make the yield cap program less rigid in July, as the market environment was calm and expectations were increasing for sustained wage growth, the minutes of their policy meeting showed Wednesday.

At the July 27-28 gathering, BOJ board members said the central bank should be prepared to respond flexibly to both upside and downside risks to inflation, adding that a tweak to the yield curve control program should not be interpreted as a step toward an exit from monetary easing, according to the minutes.

The BOJ retained the overall framework of setting short-term interest rates at minus 0.1 percent and guiding 10-year Japanese government bond yields around zero percent. But it decided to allow the 10-year yield to rise toward 1.0 percent, in a bid to allow more flexibility in the bond market.

The minutes of the July meeting pointed to growing confidence among some BOJ members about the prospect of wage growth in the next fiscal year starting in April, a critical factor in achieving the central bank's 2 percent inflation target.

"Some members noted that the market environment was currently stable, and therefore it was an appropriate time to allow greater flexibility in the conduct of yield curve control," the minutes said.

At the meeting, board members expressed concern that if the BOJ seeks to strictly cap the benchmark 10-year yield as upward momentum in prices continues, the functioning of bond markets will deteriorate and volatility in financial markets will increase.

Some also noted that the BOJ should "clearly explain that allowing greater flexibility in the conduct of yield curve control discussed at this meeting was not a step toward an exit from monetary easing, and there was no change in its stance of patiently continuing with such easing."

While the headline inflation rate has remained above 2 percent for more than a year, the BOJ has taken the view that it will slow later this year as the effects of high import costs wane. After the July meeting, the BOJ projected that the inflation target would not be achieved in fiscal 2024 and 2025.

BOJ Governor Kazuo Ueda said after the policy meeting that the decision was partly to address volatility in currency and other financial markets.

The yen has faced selling pressure relative to the U.S. dollar as the BOJ has stuck to ultralow rates while the Federal Reserve raises interest rates aggressively to curb inflation.

© Kyodo News