Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

BOJ keeps low rates as Kuroda sticks to script at swan song meeting

Published 03/09/2023, 05:03 PM
Updated 03/10/2023, 09:33 AM
© Reuters. FILE PHOTO: A man looks at a mobile phone in front of the Bank of Japan building in Tokyo, Japan June 16, 2017.   REUTERS/Toru Hanai/File Photo

© Reuters. FILE PHOTO: A man looks at a mobile phone in front of the Bank of Japan building in Tokyo, Japan June 16, 2017. REUTERS/Toru Hanai/File Photo

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) -The Bank of Japan (BOJ) maintained ultra-low interest rates on Friday and held off making changes to its controversial bond yield control policy, leaving options open ahead of a leadership transition in April.

Though widely expected by most analysts, the decision sent the yen and local bond yields tumbling as some investors unwound bets that retiring central bank governor Haruhiko Kuroda would tweak the yield curve control (YCC) at his last policy meeting.

Kuroda leaves the bank with a mixed legacy: his massive stimulus is praised for pulling the economy out of deflation, but has strained bank profits and distorted market function with prolonged low interest rates. And the country's economic growth has remained tepid.

"The BOJ has been taking various steps to mitigate the side effects of its monetary easing. I can say that the benefits of our monetary easing have far exceeded the demerits," Kuroda told a post-meeting briefing, defending his decade-long stimulus programme.

At its two-day meeting that ended on Friday, the BOJ maintained its short-term interest rate target at -0.1% and that for the 10-year bond yield around 0%.

It also left unchanged a band set around the 10-year yield target that allows the yield to fall or rise up to 0.5%. Markets have been increasingly testing the upper end of that cap as investors bet that the BOJ will have to change course soon.

"The decision to uphold policy rates comes at a cost. The BOJ will be forced to continue its massive JGB purchases to stem speculation of additional YCC tweaks, which will worsen market liquidity," said Norihiro Yamaguchi, senior economist at Oxford Economics.

The yen was last down 0.4% at 136.66 per dollar, trimming losses after a knee-jerk plunge of as much as 0.6% after the no-surprises decision. The Nikkei average slumped the most in almost three months as bank shares tumbled.

The benchmark 10-year Japanese government bond (JGB) yield pulled back sharply from the BOJ's 0.5% ceiling to hit 0.385%, its lowest since Jan. 24. The yield on the 368th 10-year note turned negative in a fresh sign of the severe market distortion caused by YCC.

Many investors expect the central bank to phase out the yield cap when Kuroda's successor, Kazuo Ueda, takes the helm in April.

A majority of economists polled by Reuters expect the BOJ to end the yield control policy this year, with half saying Ueda will carry out tweaks to the policy within three months.

"Ueda won't abruptly move and probably wait until his second meeting in June, in changing forward guidance and YCC," said Masamichi Adachi, senior Japan economist at UBS Securities.

"The BOJ will likely abandon its 10-year bond yield target, while maintaining negative interest rates, to arrest distortions in the yield curve," he said.

For now, the BOJ maintained its dovish guidance on the future policy path, saying that it expects short- and long-term policy rates to remain "at their present or lower levels."

Kuroda said Japan was making progress toward sustainably achieving the BOJ's 2% price goal, with inflation expectations heightening and more companies announcing wage hike plans.

"But there's still various uncertainties surrounding the economy. As such, it's important to maintain massive stimulus for the time," he said.

Kuroda also said he expects market function to gradually improve by conducting "flexible" market operations, underscoring the BOJ's intention to deal with distortions in the yield curve with existing tools rather than by overhauling YCC.

UEDA UP NEXT

With inflation exceeding its 2% target, the BOJ has been forced to ramp up bond buying to defend the 0.5% cap set for the 10-year bond yield - at the cost of distorting the shape of the yield curve and causing dysfunction in the bond market.

Kuroda repeated that consumer inflation, now running at double the pace of the BOJ's 2% target, will begin to slow as the effect of past spikes in fuel and raw material prices fades.

Data released on Friday showed Japan's wholesale prices rose 8.2% in February from a year earlier to mark the second straight month of year-on-year slowdown, heightening the chance the rise in consumer inflation will start to moderate in coming months.

In parliament hearings last month, Ueda echoed Kuroda's calls to keep ultra-loose policy. But the incoming governor said he had ideas on how to exit low rates, and was open to the idea of re-assessing the current policy framework.

© Reuters. FILE PHOTO: A man looks at a mobile phone in front of the Bank of Japan building in Tokyo, Japan June 16, 2017.   REUTERS/Toru Hanai/File Photo

The upper house of parliament on Friday approved the government's appointment of Ueda and his two new deputies, Shinichi Uchida and Ryozo Himino, finalising the confirmation of the new BOJ leadership.

Ueda will chair his first policy meeting on April 27-28, when the board will produce closely watched, fresh quarterly growth and price forecasts extending through fiscal 2025.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.