Remarks by Governor Ueda lead to jump in long-term JGB yields

On December 7, the bond market saw 10-year JGB yields briefly tick up by 0.105% from the day prior, showing the most significant rise since December 20 of last year. In response to this, the yen suddenly appreciated in the currency market to the level of 1USD/146.0-146.5JPY.

One of the things that triggered these large market moves was the remarks made by Governor Ueda at the Committee on Financial Affairs of the House of Councillors. When asked by member Katsube of the Constitutional Democratic Party for his opinion on upcoming initiatives, Governor Ueda responded that “The situation remains challenging. I think it will become even more challenging from the end of this year heading into the next.” He then went on to say that the Bank of Japan would be undertaking “thorough information management.” This series of remarks has led to broadening speculation in the financial market that the Bank of Japan could move to eliminate its negative interest rate policy at the end of the year or perhaps at the beginning of next year.

Yet in the end, I believe it would be unreasonable to suppose that Governor Ueda’s remarks suggested that the Bank is looking to do away with its negative interest rate policy sooner than expected. I would venture that it’s fully possible that the timing of this elimination of negative interest rates will be in the latter half of next year at the earliest, or perhaps will even be pushed off until the following year depending on overseas economic activity and U.S. interest rate cuts.

Governor Ueda enthusiastic about his duties going forward

Member Katsube’s questioning was an inquiry into how Governor Ueda intends to approach his general duties going forward, and was not asking about his stance on monetary policy. There’s no reason to suppose that the Bank of Japan’s administrative staff—in anticipation of such questions—included key phrasing in Governor Ueda’s prepared responses that would lead the market to factor in potential policy changes. Assuming that they were going to send some message to the market, they would likely do so in the part having to do with questions about monetary policy.

The most natural way to read Governor Ueda’s remarks would be to think that, as Governor, he was foreseeing that various challenges would arise heading into next year as has happened up to now, and that he was eager to keep on striving to meet those challenges.

Advance reporting of YCC tweaks highlighted at the Diet

One likely reason that Governor Ueda’s remarks caught the attention of the financial market was that just before he made them, member Katsube had asked about information management by the Bank as pertains to monetary policy decisions. This question had to do with the fact that, back when the Bank of Japan decided on measures for softening Yield Curve Control (YCC) in July and October of this year, a speculative article had been circulating in the news media immediately prior. While Deputy Governor Uchida made no direct mention of this article, Governor Ueda did note that the Bank would be conducting “thorough information management”, and this seems to have led some to link his immediately preceding remark about the situation becoming “even more challenging from the end of this year heading into the next” to a policy change.

Incidentally, my own personal speculation is that this advance reporting originated not from the Bank of Japan but rather from within the government. If that’s true, it likely means that on the first day of the Monetary Policy Meeting, or immediately after it, the Bank of Japan would have conveyed to the government its decision to tweak YCC on the following day.

Since the 1990s, policy revisions made by the Bank of Japan in a more restrictive direction have been met with criticism by the government. Given that history, we may surmise that the Bank of Japan views these tweaks to YCC as a shift toward a more restrictive policy stance (rather than moving towards further easing) allowing more room for long-term interest rates to rise, and that as such, perhaps the Bank was thinking that it needed to communicate this to the government in advance to maintain a good relationship. If that is the case, it would mean that the Bank of Japan cares a great deal about what the government thinks. And yet the truth is that we don’t really know this for sure.

The financial market faces each policy meeting ready for battle

Governor Ueda stated “from the end of this year heading into the next”, which isn’t them same as saying “from the end of this year heading into early next year”, but the financial market nevertheless has started becoming alert to the possibility that the elimination of negative interest rates or some other such policy change will be made at the Monetary Policy Meeting in December or next January. In fact, I don’t believe that likelihood is all that high, but it’s not zero either, and as such we need to stay on the lookout and pay close attention. The financial market will likely face each such policy meeting going forward ready for battle.

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  Takahide Kiuchi

  Executive Economist