BOJ Takes Another Step Towards Dismantling Stimulus: Keeps Short- and Long-Term Rate Targets Unchanged
Tokyo, Oct 31 (Reuters) – The Bank of Japan (BOJ) made further adjustments to its bond yield control policy on Tuesday, signaling its intent to loosen its grip on long-term interest rates and move towards dismantling the massive monetary stimulus implemented over the past decade.
The BOJ’s nine-member board also revised up its price forecasts, predicting that inflation will surpass its 2% target this year and next. This revision reflects a growing belief within the board that the conditions necessary for phasing out ultra-loose monetary policy are falling into place.
However, the decision did not sit well with currency traders, as the yen tumbled against the dollar. This was likely due to the BOJ’s dovish outlook, pledging to maintain its extremely accommodative policy and projecting a slowdown in inflation back below 2% by 2025.
“It looks like the BOJ is taking the ‘softly, softly’ approach here,” said Kyle Rodda, senior financial market analyst at Capital.com in Melbourne. “The incrementalism was perhaps a surprise to markets given the speculation of an actual tweak.”
As expected, the BOJ kept its short-term interest rates at -0.1% and maintained its target for the 10-year government bond yield around 0%. However, the central bank redefined 1.0% as a loose “upper bound” rather than a rigid cap and removed its pledge to defend this level with unlimited bond purchases.
“(The) BOJ will buy some bonds around that (1%) level but not unlimited and they’ve shown their hand. Through all the linguistic contortions, the fact is that they are dismantling YCC,” said Tom Nash, portfolio manager at UBS Asset Management in Sydney.
These changes in policy highlight the challenges faced by the BOJ in maintaining its bond yield control, particularly with the recent rise in global bond yields and persistent inflation. Critics argue that the BOJ’s heavy defense of the cap is causing market distortions and contributing to an unfavorable depreciation of the yen.
While the adjustments may reduce the need for the BOJ to increase its bond buying, it may also solidify market expectations of an eventual end to yield curve control and negative interest rates.
Market participants will be closely monitoring BOJ Governor Kazuo Ueda’s post-meeting press conference for indications of when the central bank could potentially move towards a full-scale exit from easy monetary policy.
Despite remaining committed to ultra-low interest rates, the BOJ is seen as a dovish outlier among other global central banks that have been more aggressive in raising rates to combat inflation. However, market expectations imply a policy shift by the BOJ as early as next year, with nearly two-thirds of economists polled by Reuters anticipating an end to negative interest rates.
Reporting by Leika Kihara and Tetsushi Kajimoto; Additional reporting by Tom Westbrook in Singapore and Kevin Buckland in Tokyo; Editing by Sam Holmes