The Bank of Japan on Wednesday maintained ultra-low interest rates, including a bond yield cap it was struggling to defend, defying market expectations it would phase out its massive stimulus program in the wake of rising inflationary pressure.
The surprise decision sent the yen skidding against other currencies as investors unwound bets they made anticipating the central bank would overhaul its yield control policy.
At a two-day policy meeting, the BOJ kept intact its yield curve control (YCC) targets, set at -0.1% for short-term interest rates and around 0% for the 10-year yield, by a unanimous vote.
Following are excerpts from BOJ Governor Haruhiko Kuroda’s comments at his post-meeting news conference, which was conducted in Japanese, as translated by Reuters:
CORE CONSUMER INFLATION
“”We expect core consumer inflation to slow below 2% toward the latter half of fiscal 2023. When looking at trend inflation, we’ll likely see inflation gradually accelerate toward our price target due to improvements in the output gap, rises in medium- and long-term inflation expectations and higher wages. But we have yet to see prospects for inflation to stably and sustainably hit our price target.”
MAINTAINING ULTRA-EASY POLICY
“Uncertainty regarding Japan’s economy is very high. It’s necessary to support the economy with our stimulus policy, to ensure companies can raise wages. By maintaining ultra-easy policy, we will strive to achieve our price target stably and sustainably accompanied by wage hikes.”
ON WIDENING OF THE YIELD BAND
“We don’t need to further expand the band around our yield target….”
“It’s been not long since we decided on our measures in December. It will likely take some more time for the measures to start having an effect in fixing market function. With our flexible market operations, however, we expect market function to improve ahead.”
“YCC is, therefore, likely to be sustainable.”
“Japan’s economy is likely to grow above its potential for three straight years. This means wages and prices will be pushed up by robust demand … On the other hand, the upward pressure from import costs will gradually fade. We’ll have both sides affecting price moves.”
EXPANSION OF BOJ’s FUND-SUPPLY OPERATION
“This step will allow us to push down longer-term interest rates without directly affecting the supply and demand of the cash JGB market. We’d like to use this tool for various maturities, and in various ways.”
“We took the December measure to enhance market function, but our intention wasn’t necessarily reflected in market moves. That’s why we decided to expand the means and methods of its market operations today, so that the effect of our steps on improving market function is maximized.”
NEGATIVE RATES ON EXPANDED FUND-SUPPLY OPERATION
“We won’t rule out applying negative rates.”
CAN NEGATIVE INTEREST RATES BE ABANDONED BEFORE INFLATION HITS 2% TARGET?
“We have a guidance pledging to keep interest rates at present or lower levels. That says it all.”
IS EXPANDED FUND-SUPPLY OPERATION A NEW TOOL FOR YCC?
“This scheme has been in place as a monetary policy tool. The expanded operation is an effective one. We’ve expanded this tool. But I don’t think our decision shows YCC is reaching its limit. In fact, this tool will help shape the appropriate shape of the yield curve.”
MASSIVE INCREASE IN BOND BUYING TO DEFEND YIELD CAP
“I don’t see a huge problem with the fact that the BOJ ramped up bond buying.”
“Unlike in the past, we expect wages to rise quite a bit, when listening to comments from the business and labor union executives. Winter bonus payments have been rising and corporate profits are at record-high levels… The pace of wage hikes is accelerating. But this is something we haven’t seen in the past… So we’re not 100% sure (whether) wages will indeed rise.”
REAL INTEREST RATES
“We need to look at real interest rates in looking at the effect of monetary easing. Real interest rates are falling, so the effect of our monetary easing has become extremely large. The fact we expanded the yield band in December hasn’t had a serious impact on the effect of our monetary easing.
CAN BOJ TARGET SHORTER-DURATION BOND YIELDS WHILE MAINTAINING YCC?
“It’s true the IMF (International Monetary Fund) has proposed as such in the past. But we think it’s most appropriate to target the short-term rate and the 10-year bond yield, which is the benchmark yield in Japan. Of course, we’re not saying we will never change anything in the YCC. But our thinking now is that the current targets are appropriate.” (Reporting by Leika Kihara; Editing by Rashmi Aich)