Japan Considers Policy Wording Change as BOJ Independence Fears Roil Bonds

• Japan's government is considering revising language on monetary policy in its economic ‌blueprint, a draft obtained by Reuters showed, as market fears it is infringing on central bank independence push bond yields to multi-decade highs.
• The possible change highlights the balancing act facing Prime Minister Sanae Takaichi, whose dovish stance and preference for aggressive fiscal and monetary support have unsettled investors and intensified scrutiny of her administration's influence over policy as borrowing costs climb.
• Since taking office in October, Takaichi has vowed to boost investment and focus on spending to revitalise the economy. Her administration has also signalled reservations over the Bank of Japan's interest rate hikes. In a draft economic blueprint released last month, the government said it was "very ⁠important for monetary policy to be guided appropriately to achieve a stronger economy." Some analysts said the wording sparked a selloff in Japanese government bonds, fuelling concerns that the government could pressure the BOJ to keep interest rates low and risk falling behind the curve as inflationary pressures build.
• In response, the government revised the language to emphasise the importance of the BOJ conducting appropriate monetary policy "to achieve stable inflation" as Japan seeks to strengthen its economy, according to the revised version of the blueprint obtained by Reuters. The revised blueprint draft, however, retained a key passage urging the central bank to align its policy decisions with the government's economic agenda. Several domestic media outlets had earlier reported that the language could be revised.
• The news failed to prevent the benchmark 10-year yield from hitting a 30-year high of 2.865% on Wednesday, July 8th "Investors' distrust over Takaichi's policy stance and its communication with markets runs deep and can't be fixed with such a minor tweak in wording," said Katsutoshi Inadome, a senior strategist ‌at Sumitomo ⁠Mitsui Trust Asset Management. "Bond markets won't stabilise unless the fiscal and monetary language of the blueprint is completely rewritten," he said, projecting the 10-year yield to hit 3% in the coming months.

(Source: Reuters)