The Bank of Japan (BOJ) yesterday kept ultra-low interest rates, but announced a broad review of its monetary policy, laying the groundwork for new BOJ Governor Kazuo Ueda to phase out his predecessor’s massive stimulus program.
As widely expected, the central bank made no changes to its yield curve control policy that sets a short-term interest rate target of minus-0.1 percent and a target for 10-year bond yields of about zero.
After the BOJ announced the policy, the yen fell about 0.6 percent to a one-week low of ￥134.87 per US dollar, while Japanese government bonds rallied. Japan’s Nikkei 225 index rose more than 1 percent to reach a new intraday high at 28,786.07 points.
Photo: REUTERS
Analysts expressed mixed views on the decision.
“The wait for the announcement sparked quite a bit of volatility in the yen and rising expectations that we will get a tweak. But eventually, even their [BOJ] announcement of a policy review came with an up to one-and-a-half-year timespan, which was longer than what market expected, even as inflation forecasts were raised across the board,” Singapore-based Saxo Markets strategist Charu Chanana said. “Looks like Japanese yen would go back to being a Treasury yield story for now.”
Singapore-based OCBC currency strategist Christopher Wong said: “The policy review is in line with our expectations for policy assessment. We still look for a removal of YCC [yield curve control] regime, interest rate hike at some stage this year amid broadening inflationary pressures and upward pressure on wage growth in Japan.”
Shotaru Kugo, an economist at the Daiwa Institute of Research in Tokyo, said: “No big surprise — the forward guidance tweak and announcement of a ‘review’ had been reported beforehand.”
“Interestingly, Ueda appears to have relied on media reports ahead of the policy meeting, as we saw relatively more pre-reports this time,” Kugo said. “Maybe that’s his way of communication to avoid surprises and gradually promulgate the policy changes to the market.”
Bank of Singapore currency strategist Moh Siong Sim said: “It does look a bit dovish, given that the market was not expecting any change, but perhaps held on to hopes that some tweaking of the policy setting, especially the YCC, may happen down the road.”
“BOJ did upgrade the inflation forecasts, but at the same time, I think the hopes of a policy change has been somewhat dampened by the review, which is expected to last one to one-and-a-half years,” he said. “That might have dampened hopes of an imminent move in the policy setting.”
Mitsubishi UFJ Morgan Stanley Securities senior market economist Naomi Muguruma said: “The BOJ sounded bearish on the price outlook, suggesting that it is unlikely to achieve its 2 percent inflation target during the forecast periods of the outlook report. In sum, the BOJ is determined to continue monetary easing for the foreseeable future.”
“The fact that the BOJ leaves a reference to further easing as needed confirmed its stance to continue monetary easing. Overall, the BOJ sounded cautious, and it stopped short of signaling any drastic change on its monetary policy outlook,” she said. “It mentioned review of monetary policy, but it was not clear to me as to specifically what effects and side-effects it wants to examine.”
Sydney-based AMP chief economist Shane Oliver said: “In any case, the key to me was they ditched the reference to the COVID-19 pandemic and the expectation that interest rates will stay at current or lower levels. The clear easing bias has been in place since October 2019. So that’s quite a significant change. That’s why I’m balanced. I think it’s hawkish, it is just moving slower than some in the money markets had been anticipating.”
“The review is a long drawn-out process. I don’t know the market will give them that long. The money markets will start to anticipate change. As the inflation numbers head higher in Japan, I suspect the markets will start to get more focused on anticipating some sort of a tightening,” he added.
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