Sandra Holdsworth, Head of Rates at Aegon Asset Management, said: “Kazuo Ueda started his tenure as Governor of the Bank of Japan taking over from Haruhiko Kuroda who had spent 10 years in the job. Over that time Kuroda supported the late Shinzo Abe’s three arrows programme, introduced negative interest rates and Yield Curve Control (YCC) as well as pursuing Quantitative Easing in the fight to get inflation sustainably to 2%.
“As he departs the latest inflation print stands at 3.3% boosted by strong food and energy prices. However, the average over the last five years remains well below target at 0.8%. With this perspective Ueda starts his employment with a job arguably only half done. The next monetary policy meeting is to be held on 28th April and there will be the usual speculation that the BOJ will make some changes to their monetary policy. Either change the bands of the YCC policy or even raise interest rates although the latter option is not reflected in current market pricing.
“However, the Bank of Japan doesn’t shy away from surprising the market, most recently changing the bands of YCC in December 2022. Going further back there was the surprise introduction of negative interest rates and YCC in 2016, the expansion of quantitative easing in 2014 and famously, back in 1989 the Bank of Japan hiked rates to 4.5% on Christmas Day causing chaos in illiquid holiday period market trading.
“A tightening of monetary policy from Japan would send ripples through other markets, there are concerns that Japan domestic investors would accelerate repatriation of assets thus leading to a stronger currency and potential weakness in other markets. In our view Ueda will tread carefully until he becomes confident that inflation around 2% is sustainable.”
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