- The BOJ keeps interest rate targets unchanged
- Governor Kuroda rules out a short-term rate hike
- Kuroda says the sharp fall in the yen is undesirable, detrimental to the economy
- The BOJ is stepping up efforts to defend the 0.25% yield cap.
TOKYO June 17 (Reuters) – Bank of Japan kept interest rates very low on Friday and pledged to defend its limit on bond yields with unlimited purchases against a global wave of monetary tightening in a show of determination to focus on supporting a lukewarm economic recovery.
The yen fell as much as 1.9% and bond yields fell after the decision, which was widely expected but disappointed some market players who speculated that the BOJ could yield to market forces and modify your performance limit policy.
However, at a glance at the impact that recent sharp declines in the yen may have on the economy, the BOJ said it should “closely monitor” the impact that exchange rate movements they can have on the economy.
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“The recent rapid fall in the yen has increased uncertainty about the outlook and made it difficult for companies to set up business plans. It is therefore negative for the economy and undesirable,” BOJ Governor Haruhiko Kuroda told a news conference. press.
At the two-day political meeting that ended on Friday, the BOJ maintained its -0.1% target for short-term rates and its promise to guide 10-year performance around 0% with a vote of 8-1.
The central bank also followed its direction to keep rates at “current or low” levels and increased a program to buy an unlimited amount of 10-year government bonds to 0.25%.
“Rising interest rates or tightening monetary policy would now add more downward pressure on an economy recovering from the pain of the COVID-19 pandemic,” Kuroda said, ruling out the possibility of a rate hike. short term.
He also said the BOJ will not tolerate a 10-year yield increase above its 0.25% implicit limit and had no plans to raise the upper limit despite pressure from rising global yields.
“There was speculation that the BOJ could change its policy to address foreign exchange movements, but the central bank’s response was no,” said Shotaro Kugo, an economist at the Daiwa Institute of Research.
Kuroda’s statements highlight the BOJ’s position as the world’s last major central bank, as its peers aggressively tighten monetary policy to curb rising inflation. Read more
TRAPPED IN A DILEMMA
European central banks raised interest rates on Thursday, some in amounts that impacted markets, following a 75 basis point rise in the US Federal Reserve. Read more
The growing divergence of policies between Japan and the rest of the world has pushed the yen to a 24-year low against the US dollar, threatening to cool consumption by increasing already rising import costs.
The government and the BOJ have stepped up their warnings against the sharp fall of the yen, including by issuing a joint statement last week indicating the readiness to enter the foreign exchange market if necessary. Read more
“We need to look closely at the impact that financial and foreign exchange market movements can have on Japan’s economy and prices,” the BOJ said on Friday, including a reference to exchange rates in its policy statement. for the first time in a decade.
However, these concerns about the weakness of the yen have not prevented the BOJ from defending its limit for its 10-year yield target by increasing bond purchases.
The yield cap has faced attacks from investors who bet the central bank could adjust its policy as rising US yields push long-term rates around the world.
The 10-year Japanese government bond yield (JGB) reached a six-year high of 0.268% on Friday at the start of trading, before falling back to 0.22% following the central bank’s policy decision.
Shortly after the announcement, the BOJ made an additional offer to buy unlimited amounts of 10-year JGB, including those with seven years until maturity.
The BOJ is caught in a dilemma. With inflation in Japan well below that of Western economies, its goal is to support the still weak economy with low rates. But peaceful politics has caused the yen to fall, hurting an economy that is heavily dependent on imports of fuel and raw materials.
Since Kuroda has ruled out rate hikes, the government may be responsible for preventing any further yen from falling, even by intervening in the market to prop up the currency.
Analysts, however, doubt that Tokyo will be able to obtain the consent of Washington and other G7 members for a joint intervention, or that intervention alone will work. Read more
“There is a myth in the market and in the public that currency intervention works. But the reality is that the government or the BOJ cannot do much to curb the fall of the yen,” said Takeshi Minami, chief economist. Norinchukin Research Institute.
“I think the BOJ will just sit well and withstand the storm.”
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Report by Leika Kihara; Additional report by Tetsushi Kajimoto, Kantaro Komiya and Daniel Leussink; Editing by Jacqueline Wong, Richard Pullin and Kim Coghill
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