(Reuters) – The Bank of Japan further loosened its grip on long-term interest rates by tweaking its bond yield control policy on Tuesday, taking another step towards ending its massive stimulus programme.
At the conclusion of its two-day policy meeting, the BOJ maintained its -0.1% target for short-term interest rates and that for the 10-year government bond yield around 0% set under yield curve control (YCC).
MARKET REACTION:
The yen weakened to around 149.42 per dollar after scaling a nearly two-week high of 148.81 overnight. The Nikkei 225 share average reversed course to register marginal gains, and was last up 0.17% at 30,749.
The 10-year JGB had yet to trade following the announcement, after the yield jumped 6.5 basis points earlier in the day to 0.955%, its highest since May 2013. Benchmark JGB futures remained weak, and were last down 0.50 point at 143.74.
COMMENTS:
KYLE RODDA, SENIOR FINANCIAL MARKETS ANALYST, CAPITAL.COM, MELBOURNE
“It looks like the BOJ is taking the “softly, softly” approach here. The incrementalism was perhaps a surprise to markets given the speculation of an actual tweak. It still seems to be on the cards, but just not today. The decision has given the Nikkei a shot in the arm, and a bit of a reprieve from the many headwinds dragging the market lower.”
MATT SIMPSON, SENIOR MARKET ANALYST, CITY INDEX, BRISBANE
“The fact that the USD/JPY has rallied suggests markets were betting on the BOJ abandoning YCC altogether. And to be fair, they may as well given yields were headed for 1% heading into the announcement. But it’s also likely the BOJ have their finger on the intervention button to cap any runaway rally on USD/JPY.”
CHARU CHANANA, MARKET STRATEGIST, SAXO, SINGAPORE
“It (the new reference range) suggests they will allow yields to rise above 1%, while still trying to keep the changes to policy very subdued. Speculation of an eventual removal of the YCC will continue to build.
“Inflation forecasts also not do not suggest that BOJ still buys the idea that inflation is more than transitory. Last week proved that USDJPY at 150 is not a line in the sand, and this could bring a test of 152. All eyes will now turn to Fed later this week, with a dovish Fed being the only hope for a recovery in the yen for now.”
NAKA MATSUZAWA, CHIEF MACRO STRATEGIST, NOMURA, TOKYO
“They’ve tried to stay as dovish as possible and not committed to additional policy changes like rate hikes. Although they raised the inflation forecasts … they still remain cautious on the 2% inflation target.
“I don’t think this was a disappointment, because it’s still a shift toward normalisation, in a way. But I think the currency market sees the balance between Japan and U.S. rates are leaning toward a stronger dollar and weaker yen.
“Previously there was talk in the market that they may set a yield target for the 10-yerar at 1.5%, compared with that … it’s a little bit dovish. Nevertheless, this is working in a way to increase the volatility of the global rates market. It depends now how … they operate on purchase operations.”
TONY SYCAMORE, ANALYST, CITY INDEX, SYDNEY
“Today’s decision will provide the BoJ with more flexibility and means it doesn’t need to expand its balance sheet to defend a set cap. It’s a clever change and it buys the BoJ time, ahead of further policy normalisation next year.”
TAKAYUKI MIYAJIMA, SENIOR ECONOMIST AT SONY FINANCIAL GROUP IN TOKYO
“Overall, the decision was more dovish than the market had expected. I say so because even as the BOJ allows the 10-year JGB yield to cross 1%, it plans to deploy any measures, contain yields if it rises too fast.
“Its inflation forecast is also conservative, with core-core inflation forecast below 2% in 2024. This means it will still have a certain distance until the BOJ exit from the negative rate policy.”
ROB CARNELL, ASIA-PACIFIC HEAD OF RESEARCH, ING, SINGAPORE
“It’s a bit weird. Yes. And I’m not sure that the markets have correctly responded to it. They are now saying the 1% is a reference rate, which sounds like there’s flexibility around that. They’re blurring the edges of 1% for the 10-year JGB.
“I’m not entirely sure whether this (market reaction) is just because more had been priced in, and maybe the market had anticipated a bigger tweak than this. And so consequently, they’re now unwinding that.”
JEFF NG, HEAD OF ASIA MACRO STRATEGY, SMBC, SINGAPORE
“It looks like the BOJ is slowly progressing towards the yield curve control removal, so this is part of a series of moves for more flexibility as global yields stay elevated.
“Maybe markets were expecting more, or it could also be a (matter of) buy the rumour, sell the fact.”
TOM NASH, PORTFOLIO MANAGER, UBS ASSET MANAGEMENT, SYDNEY
“(The) BOJ will buy some bonds around that (1%) level, but not unlimited and they’ve shown their hand. Through all the linguistic contortions, the fact is that they are dismantling YCC.
“A yield cap isn’t a yield cap if you change it every time the market gets close.”
SHOKI OMORI, CHIEF JAPAN DESK STRATEGIST, MIZUHO SECURITIES, TOKYO
“In light of the elevated inflation outlook (and higher U.S. rates outlook), the bank likely recognized the potential risk of inviting speculative activities, which could further drive interest rates upward. They needed to attempt to make fine-tuning adjustments in response.
“They didn’t want to set a target such as 1.5% because this will just keep speculative investors challenging the BoJ.
“They wanted to see stronger wage growth (before making) a dynamic change in policy.”
(Reporting by Asian bureaus; Compiled & edited by Sherry Jacob-Phillips)
