Fri, Jun 21, 2019 - Page 10 News List

BOJ governor’s yield flexibility sets up market test amid a dovish tide

Bloomberg

As peers in the US and Europe take a dovish turn, Bank of Japan (BOJ) Governor Haruhiko Kuroda yesterday signaled he is unfazed as yields in his own country get caught up in the global shift.

“There is no need to be extremely and strictly mindful about a concrete range for the rate” on Japan’s benchmark 10-year bond yield, Kuroda said.

The BOJ targets that rate to be about 20 basis points plus or minus zero.

His flexibility egged on buyers, with the yield pushing as low as minus-0.18 percent as he spoke during an afternoon news conference.

The market is likely to test just how flexible Kuroda is in the days and weeks ahead.

The BOJ kept its benchmark interest rate at minus-0.1 percent and 10-year yield target at about 0 percent earlier in the day.

Hours before that, the US Federal Reserve followed the European Central Bank in signaling a willingness to cut rates in the face of rising threats to global growth.

Economists surveyed by Bloomberg unanimously forecast no change at yesterday’s BOJ meeting, but for the first time in more than two years, a majority had predicted the BOJ’s next policy move would be to increase stimulus.

Some expect action as early as next month.

Many BOJ watchers say Fed rate cuts, seen as increasingly likely, could force the BOJ’s hand by pushing the yen to what it would consider an uncomfortably strong level.

A stronger yen would hamper the BOJ’s efforts to hit 2 percent inflation.

Core inflation, to be released today, is expected to have fallen last month to 0.7 percent and is forecast to drop further in coming months.

The US dollar yesterday fell to as low as 107.47 versus the yen in Tokyo, paring losses after Kuroda’s news conference.

Again, Kuroda expressed comfort with taking a wait-and-see approach, saying that in the end, a Fed cut might not have much of an effect if the markets have already priced it in.

“At any rate, monetary policy isn’t targeted at foreign exchange rates,” he said.

Still, Kuroda reiterated that the BOJ stands ready to add stimulus if momentum toward its 2 percent inflation goal is threatened.

However, it is unlikely to be that simple, as the BOJ also faces concerns about the accumulation of side effects from six-plus years of radical stimulus.

Many economists doubt the BOJ could even have much impact with whatever it chooses to do, because its toolbox is almost empty — complicating the risk-reward scenario.

Japan’s trade-dependent economy showed some resilience in the first three months of the year, but some economists are warning of a contraction this quarter.

The BOJ still expects conditions to improve in the second half of the year.

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