The Bank of Japan (BOJ) is making investors wait until its meeting next month for details on its paring of bond buying, sparking renewed weakness in the yen and a pushing back of bets on an interest rate hike next month.
Traders were surprised by the BOJ’s decision yesterday to flag a cut in debt purchases without laying out any figures or timeline. That is being seen as a delay in the normalization of policy, given that more than half of economists surveyed by Bloomberg had expected the central bank to begin cutting its purchases.
The announcement that the benchmark rate would remain in a range between 0 and 0.1 percent was in line with consensus.
Photo: Bloomberg
The yen slumped versus the dollar to its lowest level since April, benchmark 10-year government bonds rose, sending yields lower and swaps market pricing showed traders paring bets for a rate hike next month. Japanese stocks rose, defying a broader decline in Asian equities.
While Governor Kazuo Ueda has repeatedly shown a determination to gradually normalize policy after more than a decade of massive stimulus, the perceived pushing back of a change in bond buying points to lingering cautiousness on the board.
The renewed falls in the yen would likely generate nervousness among policymakers recalling the slide in the currency after the April BOJ meeting, a slump that culminated in Japan’s biggest-ever foreign exchange intervention.
“The BOJ is being cautious and buying time,” Daiwa Securities Co chief market economist Mari Iwashita said. “It’s unlikely the BOJ will raise interest rates in July when that now coincides with a decision to specify the bond-buying reductions.”
About a third of the economists polled before the decision had flagged July for the central bank’s next rate hike.
Now it seems that continued concern about the state of the economy and the potential for sharp yield moves have pushed back the timeline for the central bank’s next normalization steps even if this comes at the cost of further yen weakness.
“The BOJ is judging that it’s not time to let yields go up higher after they have risen rather quickly in the past few months,” Itochu Research Institute chief economist Atsushi Takeda said.
“Their concerns over the economy are outweighing concerns over pushing down the yen. Ueda is making it clear that he doesn’t directly respond to foreign exchange rates with action,” he added.
The economy shrank at an annualized pace of 1.8 percent in the first three months of the year as it continues to sputter between growth and contraction. The data showed consumers and companies cutting back on spending and unsold supplies building up on warehouse shelves as the strongest inflation trend in decades continues to crimp outlays in real terms.
Without clearer signs that the highest wage deals in decades are feeding into consumer spending, doubts would remain about the strength of the central bank’s hoped-for positive inflation cycle.
Since formally ditching the bank’s control of government debt yields in March, Ueda has said that buying bonds is no longer a monetary policy tool for the BOJ.
Still, a reduction from a pace of about ￥6 trillion (US$38 billion) per month would likely leave purchases falling short of the amount of maturing bonds each month. That would signify the start of a quantitative tightening process that sends a clearer signal of the BOJ’s pulling back of support for the economy, optics that appear to have made board members uncomfortable about moving this month.
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