The Bank of Japan (BOJ) yesterday maintained ultralow interest rates and its guidance to keep borrowing costs at “present or lower” levels, signaling its resolve to focus on supporting the economy’s tepid recovery from the COVID-19 pandemic.
However, in a nod to the hit that the yen’s recent sharp declines might have on the economy, the central bank said it must “closely watch” the impact exchange-rate moves could have on the economy.
At the two-day policy meeting that ended yesterday, the BOJ maintained its minus-0.1 percent target for short-term rates and its pledge to guide the 10-year yield at about 0 percent by a 8-1 vote.
Photo: Reuters
The decision was widely expected, but leaves the BOJ’s stance even more at odds with other major central banks, which are aggressively tightening policy to curb surging inflation.
“There was speculation the BOJ could tweak policy to address currency moves, but the answer from the central bank was no,” Daiwa Institute of Research economist Shotaro Kugo said.
“The BOJ sent out a message that while steady currency moves are important to hit its price target, it won’t guide policy with a focus on yen moves,” he said.
The bank also left unchanged guidance that short and long-term rates were expected to remain at “present or low levels.”
The yen tumbled as much as 1.7 percent and the benchmark 10-year Japanese government bond (JGB) yield fell after the BOJ’s policy decision to remain a dovish outlier.
Central banks across Europe on Thursday raised interest rates, some by amounts that shocked markets, in the wake of the US Federal Reserve’s hike of 75 basis points. A surprise move by the Swiss National Bank left the BOJ the world’s last dovish major central bank.
The growing monetary policy divergence between Japan and the rest of the world has pushed the yen to 24-year lows, threatening to cool consumption by boosting already rising import costs.
The government and the BOJ have escalated their warnings against sharp yen falls, including by issuing a joint statement last week signaling readiness to step into the currency market if necessary.
“We must carefully watch the impact financial and currency market moves could have on Japan’s economy and prices,” the BOJ said in a statement announcing its policy decision.
However, such concerns over the weak yen have not deterred the BOJ from defending an implicit 0.25 percent cap for its 10-year bond yield target through ramped-up bond purchases.
The BOJ’s yield cap has faced attack by investors betting the central bank could give in to global market forces, as rising US yields push up long-term rates across the globe.
The 10-year JGB yield hit a six-year high of 0.268 percent in early trade yesterday, exceeding the BOJ’s 0.25 percent cap, before retreating to 0.22 percent after the central bank’s policy decision.
Shortly after the policy announcement, the BOJ made an additional offer to buy unlimited amounts of 10-year JGBs, including those with seven years left until maturity.
The BOJ is caught in a dilemma. With Japan’s inflation well below that of Western economies, its focus is to support the still-weak economy with low rates. However, the dovish policy has triggered sharp yen falls, hurting an economy heavily reliant on fuel and raw material imports.
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