The Bank of Japan as widely expected kept unchanged its -0.1% target for short-term interest rates, and 0% for the 10-year government bond yield unanimously. There was much anticipation being Governor Ueda’s first decision at the BoJ. BoJ inaction drives relief through global carry trades. It was like Deja Vu, the yen weakened, JGB yields rallied in bull flattener fashion and the Nikkei gained ground. In his first press conference Ueda said “Risk from tightening too hastily is larger than monetary policy falling behind the curve” which ignited more Yen selling
The market reacted the same after the BoJ announced no change to the Yield Band (YCC) in the meeting following the shock from previous BOJ Gov. Haruhiko Kuroda adjusting the central bank’s yield curve control program. Just like the Kuroda no surprise today meant yen selling and the USDJPY rose 200 pips (+1.5%) on the no change announcement. JPY crosses rose across the board, NZDJPY +1.52%, CHFJPY +1.38%, and GBPJPY +1.32% all sharply higher.
BOJ April 2023 Monetary Policy Decision Statement
BOJ Monetary Policy Highlights
- Bank of Japan short-term interest target kept at -0.1%
- 10-year JGB yield target remains around 0%
- The BOJ yield curve control program unchanged to allow for 10-year bond yields to target a band in and around 0.50%.
- Yield curve control (a unanimous vote)
- Tweaked its forward guidance, committing to additional easing steps if needed.
- Removed references to the COVID-19 pandemic and interest rate pledges from its forward guidance
- BoJ will spend 1 to 1.5 years to review its monetary policy guidance.
- Gone is reference at the conclusion of the prior statements “it also expects short- and long-term policy interest rates to remain at their present or lower levels.”
- Retained reference to how it “will not hesitate to take additional easing measures if necessary.”
The Nikkei on Ueda’s first decision rallied 1.4%. Sovereign yields were broadly lower with Japan’s 10-year falling 7bps to 0.38% and hence well inside the unchanged 0% +/-50bps band that was once being tested. This rippled through major markets and dragged yields down everywhere.
This was the first meeting for Ueda after Governor Kuroda’s decade-long term was up in April. The BOJ also decided to conduct an examination of its monetary policy and tweaked its forward guidance, committing to additional easing steps if needed.
The bank removed references to the COVID-19 pandemic and interest rate pledges from its forward guidance and will spend 1 to 1.5 years to review its monetary policy guidance.
In the press conference Ueda adjusted comments saying the BOJ could change policy including a normalization during the review process saying, “we are not starting the review with the aim of normalizing, but it’s not zero chance we begin normalizing during the review period.”
BOJ’s Ueda Press Conference:
- Appropriate to continue monetary easing to achieve 2% inflation target
- Risk from tightening too hastily is larger than monetary policy falling behind the curve
- Japan inflation likely to slow below 2% in latter half of the year
- Decided to reorganise forward guidance given changes in government’s classification of Covid-19, lower risk of pandemic’s impact on economy and markets
- Economic indicators will provide a good judgment on that
- Can even be before next year’s labour talks i.e. shunto negotations
- Next year’s labour talks will be very important factor for inflation
- But does not mean we have to wait for it to make any decision
- The chance of starting exit from monetary easing in the next 1.5 years is ‘not zero’
- Note that BoJ research tends to show that these lagging effects can lift inflation for 1–2 years, after which they shake out.
- But chance of that being delayed to 2, 3, or 4 years later is also ‘not zero’ unfortunately
- No comment on “temporary currency movements”
Inflation is running at nearly double the BoJ’s 2% inflation target. The annual inflation rate in Japan recently accelerated to 3.8% y/y (3.5% prior, 3.6% consensus). With the fairly stable composite PMI that may signal GDP strength in Q2, the effects drove yen appreciation dampening high prices of imported raw commodities and persistent yen weakness.
Conduct of yield curve control
While significantly increasing the amount of JGB purchases, the Bank expanded the range of 10-year JGB yield fluctuations from the target level: from between around plus and minus 0.25 percentage points to between around plus and minus 0.5 percentage points.
The Bank will offer to purchase 10-year JGBs at 0.5 percent every business day through fixed-rate purchase operations, unless it is highly likely that no bids will be submitted. In order to encourage the formation of a yield curve that is consistent with the above guideline for market operations, the Bank will make nimble responses for each maturity by increasing the amount of JGB purchases even more and conducting fixed rate purchase operations.
Source: BoJ
From The Traders Community News Desk