HomeBusinessBOJ Keeps Rates Ultra-Low, Warns of Sharp Yen Drop

BOJ Keeps Rates Ultra-Low, Warns of Sharp Yen Drop

  • BOJ keeps interest rate targets unchanged
  • Governor Kuroda rules out a short-term rate hike
  • Kuroda says sharp drop in yen is undesirable and bad for economy
  • BOJ steps up efforts to defend 0.25% yield cap

TOKYO, June 17 (Reuters) – The Bank of Japan kept interest rates ultra-low on Friday and pledged to defend its cap on bond yields with unlimited buying, bucking a global wave of monetary tightening in a demonstration determination to focus on supporting a timid economic recovery.

The yen fell 1.9% and bond yields fell after the decision, which was widely expected but disappointed some market participants who believed the BOJ might cave to market forces and change its yield cap policy .

However, in a nod to the hit the yen’s recent sharp declines could have on the economy, the BOJ said it needed to “closely monitor” the impact exchange rate moves could have on the economy. the economy.

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“The recent rapid falls in the yen are adding uncertainty to the outlook and making it more difficult for businesses to make business plans. It is therefore negative for the economy and undesirable,” BOJ Governor Haruhiko said. Kuroda, during a press conference.

At the two-day policy meeting that ended on Friday, the BOJ stuck to its target of -0.1% for short-term rates and its promise to guide the 10-year yield around 0% with a vote. 8 to 1.

The central bank also stuck to its guidelines to keep rates at “current or low” levels and stepped up a program to buy an unlimited amount of 0.25% 10-year government bonds.

“Raising interest rates or tightening monetary policy now would add further downward pressure on an economy that is recovering from the pain of the COVID-19 pandemic,” Kuroda said, dismissing the possibility of a rise in short-term rates.

He also said that the BOJ would not tolerate a rise in the 10-year yield above its implied cap of 0.25% and did not intend to raise the upper limit despite the pressure from rising prices. global returns.

“There was speculation that the BOJ might change its policy to deal with currency movements, but the central bank’s answer was no,” said Shotaro Kugo, an economist at the Daiwa Institute of Research.

Kuroda’s remarks underscore the BOJ’s position as the world’s last major dovish central bank, as its peers aggressively tighten monetary policy to curb soaring inflation. Read more

Caught in a dilemma

Central banks across Europe raised interest rates on Thursday, some by an amount that shocked markets, following the U.S. Federal Reserve’s 75 basis point hike. Read more

The growing policy divergence between Japan and the rest of the world pushed the yen to a 24-year low against the US dollar, threatening to chill consumption by raising already rising import costs.

The government and the BOJ have stepped up their warnings against sharp falls in the yen, including issuing a joint statement last week that they were ready to enter the forex market if needed. Read more

“We need to carefully monitor the impact that movements in financial and currency markets could have on Japan’s economy and prices,” the BOJ said on Friday, including a reference to exchange rates in its policy statement for the first time in a decade.

These worries about yen weakness, however, did not deter the BOJ from defending its ceiling for its 10-year yield target by increasing bond purchases.

The yield cap has come under attack from investors betting that the central bank could adjust policy as rising US yields drive up long-term rates around the world.

The 10-year Japanese government bond (JGB) yield hit a six-year high of 0.268% in early trading on Friday, before falling to 0.22% after the central bank’s policy decision.

Shortly after the announcement, the BOJ made an additional bid to buy unlimited amounts of 10-year JGBs, including those with seven years left to maturity.

The BOJ is caught in a dilemma. With Japanese inflation being much lower than that of Western economies, its objective is to support the still weak economy with low rates. But the accommodative policy triggered a fall in the yen, hurting an economy heavily dependent on imported fuel and raw materials.

With Kuroda having ruled out rate hikes, it may be incumbent on the government to fend off any further fall in the yen, including by intervening in the market to support the currency.

Analysts, however, doubt that Tokyo could get consent from Washington and other G7 members for a joint intervention, or that intervening solo would work. Read more

“There is a myth in the market and among the public that monetary intervention works. But the reality is there is not much the government or the BOJ can do to stem the fall of the yen,” Takeshi Minami said. , chief economist at the Norinchukin Research Institute.

“I think the BOJ is just going to sit tight and weather the storm.”

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Reporting by Leika Kihara; Additional reporting by Tetsushi Kajimoto, Kantaro Komiya and Daniel Leussink; Editing by Jacqueline Wong, Richard Pullin and Kim Coghill

Our standards: The Thomson Reuters Trust Principles.

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