Governor Ueda presided over his first policy meeting late last month and opted to keep all monetary policy settings, including Yield Curve Control (YCC), completely unchanged. To be sure, Mr Ueda also announced that the Bank will conduct a thorough review of all monetary policy measures implemented in the last 25 years or so, a process he expects will take one to one and a half years. However, that period will be marked by inaction. While price pressures have been strengthening and underlying inflation should hit 4.5% by mid-year, we still expect lower import price inflation and a stronger yen to take inflation off the boil later this year. Japan will also follow other developed economies into recession in the second half. What’s more, speculative pressure on the yield ceiling has largely subsided. The upshot is that the case for abandoning YCC will weaken as the year drags on. That said, we’re sticking to our assessment that YCC in its current form is unsustainable over the long-run, not least because of its stifling impact on bond market functioning. Indeed, the Bank owned 53.3% of outstanding Japanese government bonds (JGB) as of end-April, just a touch shy of the all-time high of 53.9% in February. For now at least, Ueda has bought YCC yet more time with the policy review, and it is likely to remain in place until the review is complete.
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