The Bank of Japan extended its pledge to keep bond yields at zero, driving the yen lower and widening its policy gap with other central banks that have raised interest rates to contain inflation.
The BoJ’s decision to stick to its ultra-loose monetary policy exacerbated the yield divergence globally after the Federal Reserve raised its key interest rate. 0.75 percentage points this week, reminder Switzerland and UK to increase the rate.
The BoJ on Friday kept the overnight interest rate at negative 0.1%. It said it will conduct daily purchases of the 10-year bond with a yield of 0.25%, indicating an unwillingness to let the bond trade in a wider range.
The decision sent the yen plummeting to 134.63 yen against the dollar, prolonging a period of particularly volatile trading.
The yen’s recent drop to an all-time low against the dollar has put the central bank in a dilemma ahead of Japan’s upper house elections in July.
The BoJ believes that underlying demand in the economy is still too weak to tighten monetary policy. But the skyrocketing price of imported goods has upset the public and will likely be the highlight of the campaign.
Core consumer prices, excluding volatile food prices, rose at the fastest rate in seven years, hitting the BoJ’s target with a 2.1% gain in April.
But there is almost no continuity from price increases to higher wages. That has made the BoJ more confident than its European and American counterparts that current inflation will only be temporary and it needs to continue to support the economy with monetary easing measures.
The BoJ made an unusual and careful reference to the currency. Due attention should be paid to developments in the financial and foreign exchange markets and their impact on Japan’s economic activity and prices, it said.
At a press conference, BoJ Governor Haruhiko Kuroda did not repeat earlier remarks that a weaker yen has positive implications for the economy. “The desired exchange rate reflects the fundamentals of the economy and moves in a steady manner. The recent sharp depreciation of the yen is negative for the economy, he said.
Some analysts have forecast that Kuroda may seek to address the recent decline in the yen with a policy adjustment. When that doesn’t happen, traders in Tokyo say the yen could fall further.
Benjamin Shatil, a foreign exchange strategist at JPMorgan, said the decision showed the BoJ was “diging in again” but the central bank appeared to have been a bit tougher by saying it would pay attention. developments in the financial and foreign exchange markets.
The implication for the yen, he said, is that a move to a high of ¥130 against the dollar is now within the horizon and possibly even reaching 140 yen.
“With the BoJ seemingly unable to accept the wave of capitulation by the global central bank hawkish, uninterested in increasing import price pressures in Japan, and seemingly ready to buy all stocks of the [10-year Japanese government bonds] if it is necessary to maintain yield curve control, the pain for the yen looks set to shift from acute to chronic,” he said.
Tetsufumi Yamakawa, head of Japan economic research at Barclays, said he expected the BoJ to revise the YCC framework as early as July if the yen weakens more severely.
“It will question the credibility of the BoJ if it immediately reverses its policy. That would risk giving the image it has endured in the face of market pressure,” he said.
The BOJ’s decision comes as government bond trading continues to pose a direct challenge to the central bank’s resolve, especially its commitment to maintain yield curve control by keeping yields above benchmark 10-year bonds in the 0.25% range on each side 0.
After that line was repeatedly breached this week, the BoJ stepped in with a mass purchase of JGBs with a standard unlimited daily buy offer that it uses to reassure the market of its commitment to with policy.
The 10-year JGB yield touched 0.265 percent on Friday, marking its highest level since January 2016.
