Shen Wanhongyuan: Why is the Bank of Japan "standing on hold"?

Zhitong Finance APP learned that Shenwan Hongyuan’s macro team released a research report saying that the probability of the Bank of Japan adjusting YCC in the second half of this year is not high. First, the sustainability of Japan’s inflation remains to be seen. Second, the Bank of Japan is worried that adjusting YCC may affect economic recovery. However, we need to pay attention to the possibility that rising oil prices will push up Japanese government bond yields.

The Bank of Japan maintains the YCC policy unchanged, and the sustainability of inflation remains to be seen. On September 22, local time, the Bank of Japan announced its September monetary policy resolution, maintaining the negative interest rate at -0.1% and the fluctuation range of the 10Y government bond yield of plus or minus 1% (plus or minus 0.5% is the reference range). We believe that the probability of the Bank of Japan adjusting YCC in the second half of this year is not high. First, the sustainability of Japan's inflation remains to be seen. Second, the Bank of Japan is worried that adjusting YCC may affect economic recovery. 1) The Bank of Japan is concerned about whether the improvement in corporate inflation expectations can create a positive cycle of residents' income-consumption. The current corporate inflation expectations remain to be seen. The actual consumption growth rate of Japanese residents is in the negative range, and Japanese inflation is still declining under the influence of the base. The economic prerequisite for the Bank of Japan to adjust YCC again is not yet mature. Although the Bank of Japan expects inflation to pick up on wage support in its statement, this may not be seen until at least 2024. 2) The existence of YCC may have little effect on boosting Japan's economy, but if YCC is adjusted prematurely and government bond interest rates rise, it may instead hit the Japanese economy, especially Japanese corporate investment. However, we need to pay attention to the fact that rising oil prices may push up Japanese government bond yields. Kuroda, the former governor of the Bank of Japan, unconditionally defended YCC in 2022, creating a vicious cycle of "the more easing the Bank of Japan (buying bonds to protect YCC) - the weaker the yen - the higher imported inflation - the interest rate on 10Y government bonds will rise further", At the same time, the Bank of Japan's bond purchases once caused liquidity problems in the Japanese government bond market. Recently, global oil prices have risen again, coupled with the hawkish stance of the Federal Reserve's September meeting, resulting in higher U.S. bond interest rates and a weaker Japanese yen exchange rate, Japan may see energy inflation rise again. If this factor leads to 10Y Treasury bonds before the Bank of Japan judges that inflation is sustainable The yield is close to 1%, so the Bank of Japan may once again face the dilemma of whether to maintain YCC (but it seems unlikely at present. Global oil prices have risen by about US$10/barrel since the end of August, and the 10Y Japanese bond interest rate has risen by only 10BP. Around 1%, and the current 10Y Japanese bond interest rate is still about 30BP away from the upper limit of 1%).

The Bank of England paused raising interest rates, mainly due to cooling service inflation. On September 21, local time, the Bank of England's Monetary Policy Committee voted 5-4 to maintain the policy interest rate at 5.25%. However, in the statement, the Bank of England stated that if high inflation becomes more persistent, it is still possible to raise interest rates again in the future. The UK's CPI in August was 6.7% year-on-year, with the contribution of services inflation falling to 3.0% from 3.3% in July. The Bank of England said the main reason was due to falling hotel prices and air ticket prices. Behind the cooling of British service inflation is the cooling of the British job market. The British job vacancy rate is very close to that before the epidemic. The unemployment rate has continued to rise since the second half of 2022. At present,