(Reuters) – The Bank of Japan (BOJ) on Friday kept ultra-low interest rates, but announced a broad review of its monetary policy, laying the groundwork for new Governor Kazuo Ueda to phase out his predecessor’s massive stimulus programme.
As widely expected, the BOJ made no changes to its yield curve control (YCC) policy that sets a short-term interest rate target of -0.1% and that for the 10-year bond yield around zero.
But the central bank modified its guidance on the future policy path and removed a pledge to keep interest rates at “current or lower levels.”
MARKET REACTION:
The yen fell more than 1.3% to a seven-week low of 135.85 per dollar, while Japanese government bonds rallied.
Japan’s Nikkei share average rose 1.4% to its highest close in eight months, while banking stocks fell, after the central bank stood pat on its monetary policy settings.
Here are some analysts’ views on the decision:
JIM LEAVISS, CIO, PUBLIC FIXED INCOME, M&G, TOKYO
“The Fed and the U.S. economy are bailing them out from doing something right away, buying them some time. It doesn’t mean we get no change to YCC for the next one to 1-1/2 years.
“I’m surprised that they didn’t do something, especially given that the Japanese government is downgrading COVID-19 from its status from something that is driving policy to be easier, to the same status as a winter flu.
“I think the trade I would have on is still to not own very many JGBs in our portfolio.”
SIMON HARVEY, HEAD OF FX ANALYSIS, MONEX EUROPE, LONDON
“There is still an underlying view that the BoJ will have to start normalising policy, most likely in Q2.
“There’s still a major consensus call that shorting the dollar to buy yen will be the big move of the year, but we’re looking for the catalyst.”
CHARU CHANANA, MARKET STRATEGIST, SAXO MARKETS, SINGAPORE
“The wait for the announcement sparked quite a bit of volatility in the yen and rising expectations that we will get a tweak. But eventually, even their (BOJ) announcement of a policy review came with an up to 1-1/2-year time span, which was longer than what market expected (tweaks by July) even as inflation forecasts were raised across the board. Looks like Japanese yen would go back to being a Treasury yield story for now.”
CHRISTOPHER WONG, CURRENCY STRATEGIST, OCBC, SINGAPORE
“The policy review is in line with our expectations for policy assessment. We still look for a removal of YCC regime, interest rate hike at some stage this year amid broadening inflationary pressures (Tokyo core CPI rose to another record high) and upward pressure on wage growth in Japan.”
SHOTARO KUGO, ECONOMIST, DAIWA INSTITUTE OF RESEARCH, TOKYO
“No big surprise – the forward guidance tweak and announcement of a “review” had been reported beforehand. Interestingly, Ueda appears to have relied on media reports ahead of the policy meeting, as we saw relatively more pre-reports this time. Maybe that’s his way of communication to avoid surprises and gradually promulgate the policy changes to the market.”
MOH SIONG SIM, CURRENCY STRATEGIST, BANK OF SINGAPORE, SINGAPORE
“It does look a bit dovish, given that the market was not expecting any change, but perhaps held on to hopes that some tweaking of the policy setting, especially the YCC, may happen down the road.
“BOJ did upgrade the inflation forecasts, but at the same time, I think the hopes of a policy change have been somewhat dampened by the review, which is expected to last one to 1-1/2 years … That might have dampened hopes of an imminent move in the policy setting.”
JOSEPH CAPURSO, HEAD OF INTERNATIONAL AND SUSTAINABLE ECONOMICS, COMMONWEALTH BANK OF AUSTRALIA, SYDNEY
“The reactions in the JGBs and the yen suggest that there were some people that were expecting the BOJ to tighten policy at this meeting.
“There was a significant change to the policy statement today, and they scrapped the forward guidance on interest rates … I think that is a step towards them (dumping) YCC … in coming months.”
NAOMI MUGURUMA, SENIOR MARKET ECONOMIST, MITSUBISHI UFJ MORGAN STANLEY SECURITIES
“The BOJ sounded bearish on the price outlook, suggesting that it is unlikely to achieve its 2% inflation target during the forecast periods of the outlook report.
“In sum, the BOJ is determined to continue monetary easing for the foreseeable future. The fact that the BOJ leaves a reference to further easing as needed confirmed its stance to continue monetary easing.
“Overall, the BOJ sounded cautious, and it stopped short of signalling any drastic change on its monetary policy outlook. It mentioned review of monetary policy but it was not clear to me as to specifically what effects and side-effects it wants to examine.”
SHANE OLIVER, CHIEF ECONOMIST AT AMP, SYDNEY
“In any case, the key to me was they ditched the reference to the COVID-19 pandemic and the expectation that interest rates will stay at current or lower levels. The clear easing bias has been in place since October 2019. So that’s quite a significant change. That’s why I’m balanced. I think it’s hawkish, it is just moving slower than some in the money markets had been anticipating.
“The review is a long drawn-out process. I don’t know the market will give them that long. The money markets will start to anticipate change. As the inflation numbers head higher in Japan, I suspect the markets will start to get more focused on anticipating some sort of a tightening.”
SEAN CALLOW, SENIOR CURRENCY STRATEGIST AT WESTPAC, SYDNEY
On the “dovish side”, they announced an extended timeframe for a “broad-perspective review” of 1-1/2 years, which will dull expectations that the BoJ is itching to exit its accommodation. But that doesn’t necessarily rule out tweaks along the way; indeed at his upcoming press conference, Ueda may clarify that the BoJ is not tying its hands into 2024 and will adjust policy, if required.
Once again, USD/JPY popped higher on the BoJ outcome and there may well be some follow-through as attention turns to next week’s FOMC meeting. Today’s decision should solidify JPY as the funding currency of choice – for the time being – while SNB, ECB and Fed normalise.”
REDMOND WONG, SAXO MARKETS, GREATER CHINA STRATEGIST, HONG KONG
“BOJ’s plan to spend up to 1.5 years to conduct review on its monetary policy guidance is longer than what market was expecting, as some investors were expecting some drastic changes to come as soon as June and July.
“It would appear that the governor’s stance is more dovish. Still the BOJ doesn’t seem too concerned about inflation, with core CPI for 2024 at 1.7%, showing little change from the previous forecast of 1.6%.
“Banking stocks may come under pressure. Last time when the BOJ widened the 10-year bond yield target band to 0.5% in December, the only sector that rose on the news was banks, which were seen to benefit from the move due to the prospect of interest rate margin improvement. With his comment indicating that the BOJ is not in a hurry to change its yield curve control policy, bank stocks may come under pressure.”
HARUMI TAGUCHI, PRINCIPAL ECONOMIST, S&P GLOBAL MARKET INTELLIGENCE, TOKYO
“The decision was all in line with Ueda’s earlier remarks – that he would not make any abrupt policy change, the current monetary policy was appropriate, and that he would conduct a review of past policies.
“BOJ does not see any immediate need to move, since they are carefully watching if the solid wage growth this spring continues beyond next fiscal year. Some board members are seeing downside risks to the price outlook in the April report.”
TOM NASH, PORTFOLIO MANAGER, UBS ASSET MANAGEMENT, SYDNEY
“It’s still a waiting game. We’re still looking at the macro, right? And inflation is actually running hotter than in the United States … if you look at the three-month trend on core inflation – it’s 5.2% in March.
“If you take today’s Tokyo number, which is a fantastic read for the nationwide number, it says that it might even be more like 6%. If it’s down to the macro alone, then the BOJ should really be, like every other bank, most of the way through a decent-sized hiking cycle.
“(The policy review) doesn’t preclude them from doing anything. This review is around the last 25 years … I don’t understand why that would stop them from doing anything in the meantime.”
SAKTIANDI SUPAAT, REGIONAL HEAD OF FX RESEARCH & STRATEGY, MAYBANK, SINGAPORE
“I think the announcement didn’t meet the expectations of markets – some of them had expected some change to the guidance towards a slightly more of a move away from the YCC and the easing. But the fact that they announced that it’s going to be a long-term review … sort of builds in to the fact that the current easing stance will continue for that period.”
ANINDA MITRA, HEAD OF ASIA MACRO AND INVESTMENT STRATEGY, BNY MELLON INVESTMENT MANAGEMENT, SINGAPORE
“What I was taken aback by was the amount of time they’ve given themselves to do the comprehensive review of their monetary policy framework … I thought it would be a review that would have been completed by the next quarter, or at least by the end of the year. It does seem like the YCC is here to stay for a while.”
YOSHIMASA MARUYAMA, CHIEF MARKET ECONOMIST, SMBC NIKKO SECURITIES
“As expected, the BOJ offered no surprise at Ueda’s debut policy review. There was a change to its forward guidance, but it allows the BOJ to have more flexibility in guiding policy.
“If the BOJ were to start normalizing policy, the timing to do so could be the spring of 2025 at the earliest depending on how strong the results of Japan’s spring wage negotiations.
“Our view remains unchanged that the BOJ will abandon its yield curve control policy in the latter half of this year.”
MA TIEYING, ECONOMIST, DBS BANK
“BOJ’s policy statement and inflation forecasts reinforce our view that the central bank is not in a hurry to abandon YCC and will maintain the policy framework in the near term.
“The BOJ’s forecasts of core-core CPI remain lower than the 2% mark for the FY24-25 period, suggesting insufficient confidence among policymakers regarding achieving 2% inflation on a sustainable basis. The decision of conducting a broad-perspective review of monetary policy points to the chance of YCC reform next year, probably mid-2024.”
(Reporting by Asian bureaus; Editing by Sherry Jacob-Phillips)
