The Bank of Japan kept rates unchanged at the September 22 meeting, and extended the Covid-related special lending programs by 3-6 months to Dec22/Mar23. Governor Kuroda said that inflation will be higher than expected in FY2022, but it will ease from the start of next year and drop below 2% during the latter part of 2023. He also stressed that Japan’s economy has not returned to the pre-pandemic levels and is still in the middle of the pandemic recovery. These dovish remarks corroborate our view that the BOJ will maintain its yield curve control policy in the rest of this year and into 2023.
10Y JGB yield retreated 2bps yesterday, below the BOJ’s upper limit of 0.25%. USD/JPY initially rose above 145 due to the BOJ’s dovish remarks, but retreated thereafter due to reports of government interventions. According to Finance Minister Suzuki and currency chief Kanda, interventions are aimed to reduce the yen’s excessive volatility driven by speculative moves. For the yen to reverse its weakening trend, we think it would still require an improvement in Japan’s economic fundamentals (e.g., trade balance, growth outlook), rising chances of BOJ policy normalisation, or a change in external forces (e.g., peaking of US interest rates, rising risks of global recession).
In Taiwan, the central bank (CBC) raised the benchmark discount rate by 12.5bps to 1.625%, and raised the reserve requirement ratio by 25bps at the September 22 meeting. Both moves were similar as in the previous meeting in June and didn’t surprise the markets. The CBC trimmed the 2022 GDP forecast by 0.2ppt to 3.51%, and projects growth to slow to 2.9% in 2023. It also projects inflation to ease to 1.88% next year from 2.95% this year. The longer-term inflation forecast for 2023, which is published for the first time, supports our estimate of terminal interest rate at ~2% during the current tightening cycle. We are maintaining our forecast for the CBC to hike 12.5bps at each of the next two policy meetings, taking the benchmark rate to 1.75% by Dec22 and 1.875% by Mar23.
Ma Tieying 馬鐵英, CFA
Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
[email protected]Topic
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