The Bank of Japan has eased controls on its government bond market, altering a cornerstone of its ultra-loose monetary policy and prompting a surge in the country’s benchmark bond yields to the highest level in nine years.
The BoJ said it would continue to cap the yield on 10-year Japanese government bonds at 0.5 per cent but allow interest rates to rise above that level without setting “rigid limits”.
The central bank added that it would offer to buy 10-year bonds at 1 per cent in fixed-rate operations, instead of the previous 0.5 per cent, in effect widening the trading band on its long-term yields.
The move triggered confusion about whether the central bank would make further moves to normalise policy. But the BoJ maintained its minus 0.1 per cent overnight rate, saying more time was needed to sustainably achieve its 2 per cent inflation target.
Japan is the only country in the world with negative interest rates, but surging inflation this year has put pressure on the BoJ to scrap its seven-year policy of buying bonds to depress yields, known as yield curve control.
The 10-year JGB yield rose to as much as 0.572 per cent on Friday following the BoJ announcement, the highest level in almost nine years. The yield had breached the 0.5 per cent yield cap earlier in the day following a media report that the central bank would adjust its policy.
Japan’s yen, which had strengthened against the dollar in morning trading, briefly fell as much as 1.1 per cent before reversing course to be up 0.9 per cent at 139.97 yen. The benchmark Topix stock index was down 1 per cent, but a banking subindex rose 3.7 per cent.
Kazuo Ueda, the BoJ governor who took over in April, has argued that Japan’s inflation is not being driven by strong underlying consumer demand and will slow as the cost of imported commodities falls. After struggling to lift the economy out of deflation for most of the past three decades, BoJ officials are cautious about unrolling easing measures until there is firmer evidence of rising wages.
But continued rate rises by the US Federal Reserve and the European Central Bank have drawn intense scrutiny to the BoJ’s ultra-loose policy stance, compounded by price rises that have proven more widespread and resilient than anticipated.
Headline inflation in Japan rose to 3.3 per cent in June, outpacing US price rises for the first time in eight years. The BoJ on Friday upgraded its inflation outlook for fiscal 2023 from 1.8 to 2.5 per cent while slightly lowering its fiscal 2024 forecast to 1.9 per cent and warning of upside risks.
The BoJ justified loosening its yield curve controls by arguing that “greater flexibility” would support “the sustainability of monetary easing”.
“Strictly capping long-term interest rates could affect the functioning of the bond markets and the volatility in other financial markets,” the bank said in a statement at the conclusion of a two-day board meeting.
But analysts questioned the BoJ’s logic and warned that the latest change would invite investors to test the bank’s resolve.
“It’s difficult to find a rationale for this decision,” said Tetsuya Inoue, a former BoJ official who is now a senior researcher at Nomura Research Institute. “It makes more sense to explain that they are changing their policy to address rising prices.”
The central bank stunned economists in December when it altered its yield curve control policy, widening the band from a quarter to half a percentage point. JGB yields surged to the highest level in two decades, forcing the BoJ to spend billions to defend its target range.
“Rightly or wrongly, market participants will conclude that this marks the beginning of the end for YCC,” said Benjamin Shatil, FX strategist at JPMorgan in Tokyo. “The immediate is that the BoJ has allowed for more flexibility in domestic yields; but whether this also translates into a risk of higher market volatility will need to be closely watched.” – Copyright The Financial Times Limited 2023
