Markets are focusing on Japan's central bank. Here's what experts predict
31 July, 2018
With inflation in Japan expected to remain muted, some experts are predicting that the Bank of Japan will tweak its 10-year government bond yield target at its policy meeting that ends Tuesday.
With Japan's 10-year government bond yield target now at zero percent, seven among 19 bank and asset managers polled by CNBC said the BOJ could alter that target. Such a move, part of what is referred to as its yield curve control policy, could make banks' profitability improve and possibly lead to higher inflation. Estimates for the new yield target ranged from 0.1 percent to 0.2 percent.
"There is increasing speculation the BOJ may tweak its yield curve control settings in part because of lower bank profitability and muted inflation in Japan," explained Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia who was not involved in the poll.
If the BOJ does, in fact, raise its 10-year yield target, that's likely to increase profitability for banks, which benefit from a wider spread between short-term and long-term rates for arbitrage. Generally speaking, greater banking activity leads to greater economic activity and higher inflation.
Japan's central bank has long wanted the country's inflation rate to hit 2 percent, but in June, it downgraded its view on inflation, saying that consumer price growth was in a range of 0.5 percent to 1 percent.
Yet despite that recent downgrade, two banks — Goldman Sachs and J.P. Morgan — told CNBC they anticipated the central bank could again cut its inflation target.
"To strengthen its commitment to attaining the inflation target in response to the downward revision of its inflation outlook, we expect the BoJ will introduce the forward guidance to link changes in [the 10-year] yield target to inflation threshold," said J.P. Morgan's Chief Economist Hiroshi Ugai.
Overall, 11 of the 19 banks and asset managers polled said Japan's central bank is unlikely to make any change to its monetary policy given the weak inflation outlook.