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The Bank of Japan maintained ultra-low interest rates on Friday but took steps to make its yield curve control policy more flexible, underscoring growing concerns over the rising side- effects of prolonged monetary easing.
At the two-day meeting that ended on Friday, the central bank kept unchanged its short-term interest rate target at -0.1 per cent and that for the 10-year government bond yield around 0 per cent.
It also maintained guidance allowing the 10-year yield to move 0.5 per cent around the 0 per cent target, but said those would be “references” rather than “rigid limits”.
MARKET REACTION:
The dollar reversed declines against the yen to surge as much as 1.22 per cent. Japan’s Nikkei share average pared the morning session’s decline to last be down 0.38 per cent. The benchmark 10-year Japanese government bond yield remained at 0.5 per cent, the BOJ’s policy ceiling under YCC.
COMMENTS:
ATSUSHI TAKEDA, CHIEF ECONOMIST, ITOCHU ECONOMIC RESEARCH INSTITUTE, TOKYO
“This was pretty much following the Nikkei report. Fundamentally, they’re keeping things unchanged, but they will allow a little variation.”
“The second this came out, the yen weakened a bit. There were expectations long-term rates might rise more and they won’t really. It’s returned to a weaker yen direction – although compared to yesterday there’s an overall yen strengthening. But I don’t think this will lead to a stronger yen. Basically the market will continue to move on U.S. long-term interest rates.”
CARLOS CASANOVA, SENIOR ASIA ECONOMIST, UBP, HONG KONG
“Although the BOJ left the cap unchanged at ‘around 0.50 per cent’, the subtle changes in language suggest that they are gearing up, or at least open to, tweaking the YCC target at a future date, provided that conditions are supportive.”
“We believe that the BOJ could widen the target band by 25 basis points, to around 0.75 per cent above or below zero, at its December meeting. However, the markets are bound to test the limit in the months ahead.”
“Therefore, we can’t exclude the possibility that this adjustment takes place sooner, in October or even September. A more substantial adjustment, like scrapping YCC, is not likely until the BOJ completes its policy review later in 2024.”
HIROAKI MUTO, ECONOMIST, SUMITOMO LIFE INSURANCE CO, TOKYO
“The BOJ maintained the 0.5 per cent upper yield cap while setting the fixed-rate purchase operation target to 1.0 per cent. The tweak was technical and the least hawkish among the options pre-conceived by the market such as widening the yield cap to 0.75 per cent. The message of this could be even described dovish, in the way that the BOJ signalled another tweak or end of the YCC, and full-scale normalisation won’t happen anytime soon.”
CAROL KONG, CURRENCY STRATEGIST, COMMONWEALTH BANK OF AUSTRALIA, SYDNEY
“The BOJ will now regard the upper and lower bounds of the 10-year JGB trading range as ‘references, not as rigid limits’, allowing for more flexibility. But the YCC change looks purely technical. The statement continued to strike a dovish tone with the BOJ still forecasting below-target inflation in fiscal years 2024 and 2025. So, no signal of policy tightening over the forecast horizon.”
“We maintain our view the BOJ will keep its ultra-easy monetary policy settings unchanged this year, and expect USD/JPY to remain solid at 140 by the end of this quarter.”
MOH SIONG SIM, CURRENCY STRATEGIST, BANK OF SINGAPORE, SINGAPORE
“By the time the decision come in, we’re not surprised given the overnight Nikkei report. It’s a step towards a policy normalisation. This is the first step in response to the rising inflation backdrop. It does look like that still they want to manage it which is why they’re not really abandoning yield curve control.”
MATT SIMPSON, SENIOR MARKET ANALYST, CITY INDEX, BRISBANE
“The BOJ seems to be stirring some confusion and that is being reflected in price action. But with the Nikkei report setting an expectation for the BOJ to discuss widening their YCC band, anything short of actually widening it comes as a bit of a disappointment. And that has seen the yen hand back some of the strength it gained following the original Nikkei report.”
“Still, it seems clear that the BOJ is setting the stage to widen and eventually abandon YCC.”
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