BOJ maintains ultra-low rates, warns against sharp yen falls -Breaking
© Reuters. FILEPHOTO: A man in a mask stands before the Bank of Japan headquarters, Tokyo, Japan. This is during the COVID-19 (coronavirus disease) epidemic in Tokyo.
By Leika Kihara and Kantaro Komiya
TOKYO (Reuters – The Bank of Japan held ultra-low rates Friday. They also pledged to protect their cap on yields on bonds with unlimited purchasing, bucking a global trend of monetary tightening. In a sign of determination to help a tepid economy recover.
Although the outcome was expected, it disappointed many market players. They speculated that the BOJ would give in to the market and modify its yield policy.
In a sign of how the Japanese yen has been falling sharply, however, the BOJ indicated that they must be “closely watching” what impact the exchange rate moves might have on the economy.
The recent rapid fall in the yen has increased uncertainty about the outlook, making it harder for companies to create business plans. This is a bad thing for the economy, Haruhiko Kuroda of BOJ stated at a press conference.
The BOJ kept its target of -0.1% for short-term rates at Friday’s policy meeting. It also pledged to keep the 10-year yield below 0% through an 8-1 vote.
Also, the central bank remained true to its guidelines to maintain rates at “present and low” levels. They also increased a program to purchase unlimited amounts of government bonds with a 10-year maturity at 0.25%.
Kuroda stated that raising interest rates and tightening monetary policies now would put more downward pressure on an economic system still recovering from COVID-19’s pain. He dismissed the possibility of a short-term rate increase.
A BOJ official stated that it won’t accept a 10-year yield increase above its implied 0.25% ceiling and did not plan on increasing the limit in spite of rising global yields.
Shotaro Kuga, an economist with Daiwa Institute of Research, stated, “There was speculation that the BOJ would adjust policy to address currency movements. But the answer from central bank was not.”
Kuroda’s comments emphasize the BOJ’s status as the most dovish central bank in the world. Its peers are aggressively tightening monetary policy to stop inflation.
In the aftermath of the 75-basis point hike by the U.S. Federal Reserve, central banks in Europe increased interest rates Thursday.
The rising policy discordance between Japan, the United States and the rest has caused the yen against the dollar to fall to 24 year lows. It is now threatening to dampen consumption by increasing already rising import costs.
BOJ and government have intensified their warnings about sharp yen drops, with a joint statement issued last week that indicated readiness to enter the currency market if needed.
“We need to be careful about the effects that currency and financial market changes could have on Japan’s prices and economy,” said the BOJ on Friday. This was the BOJ’s first reference to exchange rate in over a decade.
The BOJ has not been deterred by concerns about weak yen. It is still defending the cap on its 10-year yield target and increasing its bond buying.
Investors have criticized the yield cap, arguing that the central bank might adjust its policy in light of rising U.S. yields which push up long-term rates around the world.
In early trade Friday morning, the yield on the Japanese 10-year government bond (JGB), was at its highest level in six years at 0.268%. It then fell to 0.22% following the bank’s policy announcement.
The BOJ offered to purchase unlimited quantities of 10 year JGBs (including those with 7 years remaining until maturity) shortly after the announcement.
BOJ finds itself in an awkward situation. Japan is experiencing a low level of inflation. The BOJ’s focus now is on supporting the weak economy through low rates. However, the dovish policies have caused a slumping in the yen. This has adversely affected an economy which relies on imported fuel and raw materials.
Kuroda has ruled out any rate increases, so it may fall on Kuroda for the government to stop any further plunge in the yen, even if that means intervening on the markets to support the currency.
However, analysts doubt that Tokyo will be able to get the consent of Washington or other G7 member countries for a joint intervention. Or, that it would succeed by stepping in alone.
The myth that currency intervention is effective has been perpetuated by the market and the public. However, the truth is that there are very few things the BOJ or government can do to stop yen fallings,” stated Takeshi Minami (chief economist at Norinchukin Research Institute).
“I think that the BOJ will be able to weather the storm by just sitting tight.”