Governor Ueda to cull YCC as his first act

Japan has escaped the recent banking turmoil in the US and Switzerland relatively unscathed. While banks face some risks arising from their lending exposure overseas, there are no signs of liquidity stress. And unrealised losses on bonds are less of a problem with the Bank of Japan holding down bond yields. Meanwhile, corporates are reporting the same ease of access to credit, whether in the form of bank loans or short-term commercial paper. While the financial system as a whole has remained resilient, the Japanese government bond (JGB) market is still labouring under the stifling presence of the Bank, which owned around 54% of outstanding issues as of March. (See Chart 1.) Unsurprisingly, a record proportion of market participants thought that bond market functioning was “low” in the latest Bond Market Survey conducted in February, and things are unlikely to have improved much since. Governor Ueda, who assumed office on Sunday, has stressed the need to manage the side effects of monetary easing. Admittedly, Ueda also said at his first press conference as governor that it is “appropriate to maintain YCC for now”. But ending YCC is not something that can be telegraphed, lest it result in a disorderly exit from the policy. As such, we still expect Ueda to abandon YCC at his first policy meeting later this month.