The Bank of Japan maintained ultra-low interest rates on Friday and vowed to defend its cap on bond yields with unlimited buying, bucking a global wave of monetary tightening in a show of resolve to focus on supporting a tepid economic recovery.
The yen fell as much as 1.9% and bond yields fell after the decision, which was widely expected but disappointed some market players who speculated the BOJ could give into market forces and tweak its yield cap policy.
However, in a nod to the hit that the yen’s recent sharp declines may have on the economy, the BOJ said it must “closely watch” the impact exchange-rate moves could have on the economy.
“Recent rapid falls in the yen heighten uncertainty on the outlook and make it difficult for companies to set business plans. It’s therefore negative for the economy and undesirable,” BOJ Governor Haruhiko Kuroda told a news conference.
At the two-day policy meeting that ended on Friday, the BOJ maintained its -0.1% target for short-term rates and its pledge to guide the 10-year yield around 0% by an 8-1 vote.
The central bank also stuck to its guidance to keep rates at “present or low” levels, and ramped up a program to buy an unlimited sum of 10-year government bonds at 0.25%.
“Raising interest rates or tightening monetary policy now would add further downward pressure on an economy that is in the midst of recovering from the COVID-19 pandemic’s pain,” Kuroda said, brushing aside the chance of a near-term rate hike.
He also said the BOJ won’t tolerate a rise in the 10-year yield above its implicit 0.25% cap, and had no plan to increase the upper limit despite pressure from rising global yields.
“There was speculation the BOJ could tweak policy to address currency moves, but the answer from the central bank was no,” said Shotaro Kugo, an economist at Daiwa Institute of Research.
Kuroda’s remarks highlight the BOJ’s position as the world’s last major dovish central bank, as its peers aggressively tighten monetary policy to curb surging inflation.
CAUGHT IN A DILEMMA
Central banks across Europe raised interest rates on Thursday, some by amounts that shocked markets, in the wake of the U.S. Federal Reserve’s 75-basis-point hike.
The growing policy divergence between Japan and the rest of the world has pushed the yen to 24-year lows against the U.S. dollar, 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 on Friday, including a reference to exchange rates in its policy statement for the first time in a decade.
Such concerns over the weak yen, however, have not deterred the BOJ from defending its cap for its 10-year yield target by ramping up bond purchases.
The yield cap has faced attack by investors betting the central bank could adjust its policy as rising U.S. yields push up long-term rates across the globe.
The 10-year Japanese government bond (JGB) yield hit a six-year high of 0.268% in early trade on Friday, before retreating to 0.22% after the central bank’s policy decision.
Shortly after the 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 stil-weak economy with low rates. But the dovish policy has triggered a slump in the yen, hurting an economy heavily reliant on fuel and raw material imports.
With Kuroda having ruled out rate hikes, the onus may be on the government to fend off any further yen plunge, including by intervening in the market to prop up the currency.
Analysts, however, doubt Tokyo can get consent from Washington and other G7 members for a joint intervention, or that stepping in solo would work.
“There’s a myth in the market and public that currency intervention works. But the reality is there’s not much the government or the BOJ can do to stem yen falls,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
“I think the BOJ will just sit tight and weather the storm.”
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