BOJ Holds Ground On Ultralow Rates As Japan Warns Over Yen Moves
The yen slid to a fresh 24-year low as Bank of Japan stood by its ultralow interest rates, further isolating itself from a global wave of policy tightening.
(Bloomberg) -- The Bank of Japan continued to stand by its ultralow interest rates as it further isolated itself from a global wave of policy tightening, fueling a slide in the yen to a fresh 24-year low and ramped-up warnings of possible intervention.
Within hours of the Federal Reserve’s latest rate hike, Governor Haruhiko Kuroda and his fellow board members kept the BOJ’s yield curve control program and its asset purchases unchanged Thursday as had been widely expected. The decision still pushed the yen to as weak as 145.37 against the dollar, prompting a stronger warning from Japan’s top currency official.
“We could do a stealth intervention, and even though I’m not in a position to comment on whether an intervention was done or not, honestly-speaking, we haven’t done it yet,” said Masato Kanda, talking to reporters at the finance ministry after the yen had already pared back some of the lost ground.
The yen’s descent brings it within striking distance of the 146.78 level where the authorities last stepped in to prop it up in 1998. Hedge funds have been adding to bearish bets on the currency, which has tumbled more than 20% this year, with Goldman Sachs Group Inc. warning it may decline all the way to 155.
“The only thing that can stop USD/JPY from rising toward 150 is Japanese FX intervention,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. “But even then it will only be a temporary respite.”
A stealth intervention would likely involve entering in the market on a smaller scale that is more difficult to detect instead of the sharp sudden large moves associated with more regular approach to intervention.
The remarks from Kanda came after the BOJ decision showed Kuroda’s determination to stand his ground even at the cost of further falls in Japan’s currency and more bond buying to defend a cap on bond yields. The combination of central bank easing and government warnings suggests a division of labor to support the country’s policy stance.
“Today’s outcome strengthens my view that the chance of policy change is almost zero under Kuroda’s governorship,” said Masamichi Adachi, chief Japan economist at UBS Securities. “One of the most interesting results of this meeting was that the vote on policy was unanimous.”
Kuroda has repeatedly signaled that there’s still a long way to go before policy in Japan can be normalized. In sharp contrast with the Fed’s aggressive rate increases, the BOJ’s forward guidance is still flagging the possibility of rates going lower, not higher.
The 10-year sovereign yield dropped below the BOJ’s cap of 0.25% for the first time since last week. Still, the yen and the yield cap are likely to remain under pressure as the tide of global rate hikes continues. Stocks were remained down following the hawkish comments from Fed Chair Jerome Powell overnight, but pared some of the losses after the BOJ decision.
In a busy week of central bank gatherings, the Bank of England, the Norges Bank and the Swiss National Bank are all seen raising rates later Thursday.
The expected move by the SNB will leave the BOJ as the last major central bank in the world with a negative interest rate.
“The yen weakened after today’s decision but not by much so far,” Adachi said. “That shows the intensified warnings by Japan’s currency officials are working. Traders are having to weigh up the chance of currency intervention.”
Kuroda has so far clearly ruled out the possibility of policy adjustments to stop the yen’s slide. He’s repeatedly said the economy needs monetary stimulus until higher wage gains can make the cost-push inflation sustainable.
That means the BOJ is sticking with its short-term interest rate of -0.1% and its cap on long-term bond yields. In the last five working days the central bank has spent around 2.9 trillion yen ($20 billion) on fixed-rate purchases of bonds to defend the 0.25% cap.
While the daily purchases have been required again after a lull of more than two months, that amount is less than half the 7.5 trillion yen the central bank forked out on the purchases in the five days up to its June decision.
Kuroda’s unchanging message has convinced an overwhelming majority of economists to expect no policy shift triggered by inflation or the weak yen before Kuroda ends his term on April 8.
Still, BOJ watchers are looking out for any increase in political pressure, as that could be a game changer for monetary policy. Prime Minister Fumio Kishida is set to pick the next central bank chief and two deputy governors, making it hard for the bank to reject government requests, they say.
(Adds comments from Japan’s top currency official)
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