BOJ Holds Policy as It Pushes Back Against Market Speculation
The BOJ kept its main policy settings unchanged, leaving its negative interest rate at -0.1% and 10-year bond yields around 0%.
(Bloomberg) -- The Bank of Japan doubled down on its stimulus defense, pushing back against intense speculation of policy change, prompting a sharp slide in the yen and surge in bonds.
Governor Haruhiko Kuroda’s board kept its main policy settings unchanged, leaving its negative interest rate at -0.1% and 10-year bond yields around 0%, according to its latest policy statement Wednesday.
The bank said it would continue large-scale bond buying and increase it on a flexible basis if needed as it showed its intention to commit to yield curve control for now. It extended a loan offer to banks in a bid to encourage debt purchases from them.
The BOJ’s updated forecasts indicate officials still don’t see inflation staying above 2% in a sustainable manner over the coming years, offering a justification for further stimulus even after Kuroda steps down in April.
The yen tumbled more than 2% to 131.25 per dollar following the decision, while benchmark 10-year yields sank more than 10 basis points to below 0.4% when they reopened from the lunch break. Stocks jumped more than 2%.
BOJ Seen as Small Setback for Yen But Pressure on Bonds to Stay
“This means there’s a higher chance the BOJ will pass the current policy framework on to the next leadership rather than changing it under Kuroda,” said Hideo Kumano, executive economist at Dai-Ichi Life Research Institute. “March is a period for corporate earnings and the BOJ wouldn’t want to rock the boat and cause confusion then.”
“But I remain very nervous until I’ve seen Kuroda’s press conference later today. He could signal policy changes. That risk, I think, is keeping the yen from falling even lower,” he said. The governor is expected to speak from 3:30 pm in Tokyo, before setting off to the World Economic Forum in Davos, Switzerland.
While almost all 43 economists surveyed had forecast the stand-pat decision, many of them had said they couldn’t rule out the possibility of back-to-back action.
Speculation that the BOJ would take clearer steps toward a normalization of policy intensified after it unexpectedly widened its 10-year yield target band last month. Since then Kuroda’s massive easing program has come under the fiercest market attacks of his decade-long term.
While Kuroda insisted that last month’s move aimed to improve market functioning, it only fueled speculation over more changes, given that the new yield cap has come under attack from speculators.
December’s doubling of the yield ceiling to 0.5% has done little to improve liquidity and a distortion in the yield curve flagged by Kuroda has deepened since then. Some believe there will be more action even before the governor’s term ends.
“Last month’s surprise move meant that the BOJ likely had to look at its impact for now,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. “The yield curve hasn’t quite moved in the way the BOJ probably wanted, but if the BOJ moved again now it would certainly look like it was responding to market pressure, making it ultimately more difficult to sustain yield curve control.”
In the run up to the gathering, speculation heated up as 10-year yields repeatedly breached its new ceiling of 0.5%. The market push forced the BOJ to buy a record amount of bonds at the end of last week.
The central bank bought a total of around 3 trillion yen ($23 billion) of government bonds over Monday and Tuesday. It spent almost 10 trillion yen defending its stimulus framework on the final two days of last week.
With the memory of December’s shock move still vivid in the mind of global investors, bets on further BOJ shifts are unlikely to go away, with bonds and the yen among the markets most at risk.
The yen could weaken to the 135 per dollar level if the BOJ continues to maintain its monetary policy setting into the next meeting, according to SAV Markets.
“There are some good levels at around 134, 135 for investors to take dollar-yen to,” says Shyam Devani, macro trader at SAV Markets in Singapore. “This story is not over yet — investors will continue looking to test the BOJ.”
A number of economists have already brought forward their expected timing for a policy shift, according to this month’s Bloomberg survey. Some now predict a change in April, the first meeting scheduled under a new governorship, while others expect a pivot in June.
Speculation is likely to remain also because Japan’s inflation is currently running far above the BOJ’s 2% target level. The cost of living is expected to hit double that rate in national data to be released Friday. Still, the bank’s updated forecasts didn’t show inflation averaging 2% or more in the next two fiscal years.
In its new quarterly economic projections Wednesday, the nine-member board raised its price forecast for this year and for fiscal 2024. But they still see prices cooling in the year starting in April, in part due to the impact from government measures that are expected to lower utility bills.
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(Updates throughout)
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