Economic Research View
Japan: First Impression of BOJ July Monetary Policy Meeting
Nomura Asset Management Co., Ltd. Published July 28, 2023

Rumi Kurumizawa, CMA
Chief Economist
At the Monetary Policy Meeting held from July 27 to 28, the Bank of Japan (BOJ) decided to bringgreater flexibility regarding Yield Curve Control (YCC) measures in order to strengthen thesustainability of monetary easing. The central bank raised its price outlook for fiscal 2023, but said itwas "more or less unchanged" for fiscal 2024 and 2025 and does not expect to achieve the 2% pricestability target in a sustainable and stable manner. The 10-year bond yield fluctuation range of about±0.5% is now described as “reference” rather than “rigid limits”. Additionally, the Bank mentions that it
will offer to purchase 10-year JGBs at 1.0 percent every business day through fixed-rate purchase
operations, although no bids are expected to be submitted under the current interest rate environment,
implying that the Bank has effectively removed the cap on long-term interest rates nonetheless paying
attention to any rapid increase in the interest rates. BOJ Policy Board might have been afraid to let goof YCC completely, so it might have presented ±50bp as a reference range and attached a right toexecute limit operations to maintain it for the time being.

■At the Monetary Policy Meeting held from July 27 to 28, the Bank of Japan decided to bring greater
flexibility regarding Yield Curve Control (YCC) measures. It said that conditions do not support
expectations of achieving the 2% price stability target in a sustainable and stable manner, and thatmonetary easing must be continued persistently under the current policy "framework" and that themeasures were designed to respond flexibly to upside and downside risks given the extremely highlevel of economic and price uncertainty. The report is largely in line with my expectation that the central
bank will make adjustments to strengthen the sustainability of monetary easing, not necessarily
because it is more confident that it will achieve its inflation target.

■

Specifically, the fluctuation range in the yield curve control for 10-year bonds has been changed from"rigid limits" to "reference" with its range upper limit set at 100 basis points. In the Bank of Japan'swording, the scope of “reference” is quite broad. If there are no bids for a fixed-rate purchase
operations without reaching the limit of 100bp for a certain period of time, the 100bp consecutive
purchase operation itself may be withdrawn.
June 2023: The Bank will continue to allow 10-year JGB yields to fluctuate in the range of aroundplus and minus 0.5 percentage points from the target level, and will offer to purchase 10-year
JGBs at 0.5 percent every business day through fixed-rate purchase operations, unless it is highly
likely that no bids will be submitted.

July 2023: The Bank will continue to allow 10-year JGB yields to fluctuate in the range of aroundplus and minus 0.5 percentage points from the target level, while it will conduct yield curve control
with greater flexibility, regarding the upper and lower bounds of the range as references, not as
rigid limits, in its market operations. The Bank will offer to purchase 10-year JGBs at 1.0 percent

every business day through fixed-rate purchase operations, unless it is highly likely that no bids
will be submitted.
■From the evening of July 21, there were a series of observational reports, and Reuters said, "Maintainstatus quo, YCC unchanged" but the English version and the Yomiuri Shimbun on the 22nd said,"While maintaining the YCC framework, modifications are possible". As market sentiment tilted towards"50/50, slightly closer to maintaining the status quo", the Nikkei reported in the middle of the night that"BOJ proposes to allow rate manipulation to exceed 0.5% limit" and the yen strengthened a little rapidly
in the foreign exchange market. In the bond market on July 28, the 10-year yield exceeded the upper
limit of 50 basis points and bids were placed for a range bound operation. I was a bit less certain givensuch media coverage in the previous week to the Monetary Policy Meeting, but maintained myexpectation that the YCC would allow greater flexibility in July, given comments made such as ViceMinister of Finance for International Affairs Masato Kanda's attempt to give the impression of "pushingback the status quo" as well as Reuters’ reports in English. I had expected that the BOJ Board wouldwithdraw the 50 basis points fixed-rate purchase operation on a daily basis and move to de-facto
elimination of YCC, but the result was a 100 basis point range bound operation. However, it is likelythat the difference is not substantial.

■“Signs of change have been seen in firms' wage- and price-setting behavior, and inflation expectations
have shown some upward movements again." the BOJ statement said. If the trend continues in theupward direction, (1) A decline in real interest rates could strengthen the monetary easing effect, while(2) A strict cap on long-term interest rates could affect the functioning of the bond market and volatility
in other financial markets. The decision was made to balance the effects and side effects. The outlook
for monetary policy is expected to remain unchanged for the rest of the year. It is expected that aclearer decision will be made on the negative interest rate and the YCC framework themselves after
next spring.

Figure 1. BOJ’s Greater Flexibility of Yield Curve Control

Note: Nomura Asset Management based on Bank of Japan data. https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2023/mpr230728d.pdf2Figure 2. U.S. core consumer prices continue to rise

Figure 3. Changes in scheduled cash earnings

Source: Nomura Asset Management based on data from the Ministry ofInternal Affairs and Communications Bureau of Statistics

Source: Source: Nomura Asset Management based on CEIC data.

Figure 4. Policy Committee members' economic and price outlook and risk assessment

Source: Nomura Asset Management based on Bank of Japan data.

*This commentary is based on personal views of the author and does not necessarily represent Nomura AssetManagement house view.

Disclaimer
This report was prepared by Nomura Asset Management Co., Ltd. (“NAM”) for information purposes only. Although thisreport is based upon sources we believe to be reliable, we do not guarantee its accuracy or completeness. Unlessotherwise stated, all statements, figures, graphs and other information included in this report are as of the date of thisreport and are subject to change without notice. The contents of this report are not intended in any way to indicate orguarantee future investment results. Further, this report is not intended as a solicitation or recommendation with respect
to the purchase or sale of any particular investment. This report may not be copied, re-distributed or reproduced inwhole or in part without the prior written approval of Nomura Asset Management Co. Ltd. Registration Number: DirectorGeneral of the Kanto Local Financial Bureau No.373 Membership: The Investment Trusts Association, Japan, Japan
Investment Advisers Association, Type II Financial Instruments Firms Association.

3