The BOJ kept its target for 10-year yields at around 0% but said its 0.5% ceiling was now a reference point, not a rigid limit as it sought to make its ultra-loose monetary policy program more flexible. The bank said it will offer to buy 10-year debt at 1% each day, suggesting an effective doubling of the movement range for yields.
The Bank of Japan jolted financial markets by loosening its grip on bond yields in Governor Kazuo Ueda’s first surprise move since taking the helm, a step that will likely spur talk of potential policy normalization to come.
Ueda said the moves didn’t represent a step toward the end of its yield curve control program, some investors were unconvinced
Japan’s benchmark bond yield surged to the highest since 2014, extending gains above the central bank’s previous 0.5% cap.
“The BOJ is starting its withdrawal from yield curve control,”
The BOJ is a closely watched driver of markets around the world, in part because Japanese investors are major holders of US government bonds and own everything from Brazilian debt to European power stations.
Simply widening the 0.5% range would’ve been seen as an effective rate hike, so the BOJ avoided giving that impression by setting 1.0% for fixed-rate purchases,” said Nobuyasu Atago, chief economist at Ichiyoshi Securities and a former BOJ official. “That makes it harder for the markets to judge the moves as a clear tightening step.”
The latest forecasts released with the decision show that while the BOJ now sees inflation averaging well over 2% this year, it predicts it will weaken below the target in the next fiscal year. The suggests the bank may need to keep its stimulus going for longer.
Still, a pledge by the central bank to buy 10-year government debt at 1% each day instead of 0.5% would suggest a new line in the sand.
Ueda will continue to face a tough communications challenge over the coming months to argue that the move isn’t simply another step toward the end of yield curve control.
Only 18% of 50 economists polled by Bloomberg were expecting a YCC tweak at this meeting, though about half foresaw such a move no later than October.
“The move tarnishes Governor Kazuo Ueda’s reputation as a clear communicator. Ueda has been consistent in sending dovish signals. But his actions may now be perceived as unpredictable and even hawkish.”
Ueda probably chose to rid the board of a major headache at an early stage in his tenure, taking advantage of relative calm in the market,
“We were more aware of future risks this time,” said Ueda, stressing that it would be harder to make changes to YCC after upside price risks emerge. Given the relative calm in the markets, “we thought that it was the perfect time to make adjustments,” he said.
BOJ Core Inflation Forecasts April July FY2023 1.8% 2.5% FY2024 2.0% 1.9% FY2025 1.6% 1.6%
A growing consensus that the US and European central banks are nearing an end to their tightening cycles has eased upward pressure on global bond yields, a development that offered a window of opportunity for the BOJ to adjust YCC with a lower risk of a surge in Japanese yields.
Japan’s stocks hit a 33-year high earlier this month and the yen has stayed around 140 per dollar, limiting the adverse impact from yield control adjustment.
this should favor yen appreciation.
Glasp is a social web highlighter that people can highlight and organize quotes and thoughts from the web, and access other like-minded people’s learning.