Image: Reuters Berita 24 English - On Friday, the Bank of Japan kept its ultra-low interest rates and pledged to preserve its bond yield ca...
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| Image: Reuters |
Berita 24 English - On Friday, the Bank of Japan kept its ultra-low interest rates and pledged to preserve its bond yield cap with limitless buying, defying a global tide of monetary tightening in a show of determination to help a sluggish economic recovery.
After the decision, which was generally predicted but disappointed some market players who expected the BOJ to cave in to market forces and change its yield cap policy, the yen plummeted as much as 1.9 percent and bond yields fell.
The BOJ, however, stated that it must "closely monitor" the impact exchange-rate movements may have on the economy, a nod to the recent severe drops in the yen.
"The yen's recent rapid depreciation has heightened uncertainty about the outlook and made it difficult for businesses to formulate business plans. As a result, it has a negative impact on the economy and is undesired "At a press conference, BOJ Governor Haruhiko Kuroda stated.
By an 8-1 vote, the BOJ reaffirmed its -0.1 percent short-term rate target and commitment to keep the 10-year yield around 0% at its two-day policy meeting, which ended on Friday.
The central bank also kept rates at "current or low" levels, and increased a programme to buy an unlimited amount of 10-year government bonds at 0.25 percent.
"Raising interest rates or tightening monetary policy now would add further negative pressure on an economy that is still recuperating from the pain of the COVID-19 outbreak," Kuroda said, dismissing the possibility of a rate hike in the foreseeable future.
He also stated that, despite rising global yields, the BOJ will not permit a rise in the 10-year yield above its implicit 0.25 percent target, and that there are no plans to raise the upper limit.
"There was speculation that the Bank of Japan could adjust policy to address currency movements, but the central bank's response was no," said Shotaro Kugo, an economist at Daiwa Institute of Research.
As its counterparts aggressively tighten monetary policy to combat increasing inflation, Kuroda's words emphasise the BOJ's status as the world's last major dovish central bank.
IN THE MIDDLE OF A CONFLICT
Following the US Federal Reserve's 75-basis-point boost, central banks throughout Europe raised interest rates on Thursday, some by surprising amounts.
The yen has fallen to 24-year lows versus the US dollar as a result of widening policy divergence between Japan and the rest of the globe, threatening to reduce consumption by raising already rising import costs.
The government and the Bank of Japan have increased their warnings about yen depreciation, including making a joint statement last week signalling their preparedness to intervene in the currency market if necessary.
"We must carefully monitor the impact of financial and currency market movements on Japan's economy and prices," the BOJ stated on Friday, for the first time in a decade incorporating a reference to exchange rates in its policy statement.
Concerns over the weak yen, on the other hand, haven't stopped the BOJ from increasing bond purchases to preserve its 10-year yield target cap.
Investors speculating that the central bank will modify its policy as U.S. yields rise, pushing up long-term rates throughout the world have attacked the yield cap.
In early trade on Friday, the 10-year Japanese government bond (JGB) yield touched a six-year high of 0.268 percent, before falling to 0.22 percent after the central bank's policy decision.
Shortly after the announcement, the BOJ issued another offer to buy an unlimited quantity of 10-year JGBs, including those with seven years to maturity.
The BOJ is stuck in a bind. With inflation substantially below that of Western economies, Japan's focus is on using low rates to bolster the still-weak economy. However, the dovish approach has caused the yen to fall, hurting an economy that is largely reliant on imported petroleum and raw materials.
With Kuroda ruling out rate hikes, the government may be forced to intervene in the market to keep the yen from falling further.
Analysts, on the other hand, mistrust Tokyo's ability to gain approval from Washington and other G7 members for a joint intervention, or that intervening alone would be effective.
"There is a widespread belief in the market and among the general public that currency intervention works. However, there isn't much the government or the Bank of Japan can do to stop yen depreciation "Norinchukin Research Institute's head economist, Takeshi Minami, stated.
"I believe the BOJ will simply sit tight and ride out the storm."
