- BOJ keeps interest rate targets unchanged
- Governor Kuroda rules out a near-term rate hike
- Kuroda says the yen’s sharp fall is undesirable, and bad for the economy
- BOJ ramps up efforts to defend the 0.25% yield cap
The Bank of Japan retained extremely-low interest rates on June 17 and promised to preserve its cap on bond yields with unlimited buying, resisting a global wave of monetary tightening in a show of determination to concentrate on supporting a tepid economic boom.
In that context, the yen lost as much as 1.9% and bond yields slumped after the decision, which was widely anticipated but displeased some market participants who predicted the BOJ could bow to market forces and adjust its yield cap policy.
However, in a remark to the hit that the yen’s latest steep falls may have on the economy, the BOJ said it must “closely watch” the effect exchange-rate moves could have on the economy.
BOJ Governor Haruhiko Kuroda told a news conference:
“Recent rapid falls in the yen heighten uncertainty on the outlook and make it difficult for companies to set business plans. It’s therefore negative for the economy and undesirable.”
At the two-day policy meeting that concluded on Friday, the BOJ retained its -0.1% target for short-term rates and its vow to steer the 10-year yield around 0% by an 8-1 vote.
The central bank also adhered to its guidance to maintain rates at “present or low” levels and expanded a program to buy an unlimited sum of 10-year government bonds at 0.25 percentage points. Kuroda said while disregarding the chance of a near-term rate rise:
“Raising interest rates or tightening monetary policy now would add further downward pressure on an economy that is recovering from the COVID-19 pandemic’s pain.”
He also said the BOJ will not allow an increase in the 10-year yield above its fixed 0.25% cap, and had no plan to extend the upper limit despite pressure from increasing global yields.
“There was speculation the BOJ could tweak policy to address currency moves, but the answer from the central bank was no,” said Shotaro Kugo, an economist at Daiwa Institute of Research.
Kuroda’s remarks underscore the BOJ’s position as the world’s last major laid-back central bank, as its peers hawkishly tighten monetary policy to combat soaring inflation.
CAUGHT IN A DILEMMA
Central banks across Europe hiked interest rates on Thursday, some by amounts that crashed markets, in the wake of the U.S. Federal Reserve’s 75-basis-point increase. The enlarging divergence between Japan and the rest of the world has driven the yen to 24-year lows against the U.S. dollar, threatening to weaken consumption by lifting already growing import costs.
The government and the BOJ have increased their warnings against sharp yen declines, including by giving a joint statement last week indicating willingness to interfere with the currency market if necessary.
“We must carefully watch the impact financial and currency market moves could have on Japan’s economy and prices,” the BOJ said on Friday, including a mention of exchange rates in its policy statement for the first time in ten years.
Such concerns over the devalued yen, however, have not discouraged the BOJ from defending its cap for its 10-year yield target by enhancing bond purchases. The yield cap has been targeted by investors expecting the central bank could tweak its policy as expanding U.S. yields elevate long-term rates across the globe.
The 10-year Japanese government bond (JGB) yield reached a six-year high of 0.268% in early trade on Friday, before backtracking to 0.22% after the central bank’s policy decision. Soon after the announcement, the BOJ submitted an additional offer to buy unlimited amounts of 10-year JGBs, including those with seven years left until maturity.
In that context, the BOJ is faced with a dilemma. With Japan’s inflation well beneath that of Western economies, its focus is to hold up the still-weak economy with low rates. But the relaxed policy has caused a decline in the yen, destroying an economy heavily reliant on raw material and fuel imports.
With Kuroda having eliminated rate increases, the burden may be on the government to avoid any further yen slump, including by intervening in the market to bolster the currency. Analysts, however, doubt Tokyo can obtain approval from Washington and other G7 members for a joint intervention, or that taking solo action would work.
Takeshi Minami, the chief economist at Norinchukin Research Institute, stated:
“There’s a myth in the market and public that currency intervention works. But the reality is there’s not much the government or the BOJ can do to stem yen falls. I think the BOJ will just sit tight and weather the storm.”