–Adds Governor Comments from News Conference
–Governor Ueda: BOJ Will Use Short-Term Rate as Key Monetary Policy Adjustment Tool; Reducing JGBs to Carry Close to No Monetary Policy Feature
By Max Sato
(MaceNews) – The Bank of Japan said Friday its nine-member board decided in a unanimous vote to hold the overnight interest rate target steady in a range of 0% to 0.1%, as widely expected, after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework in March.
At the same time, the board decided in an 8 to 1 vote to set the stage for gradually reducing the bank’s large holdings of various financial assets for the next year or two years.
The no vote came from the usual suspect, Toyoaki Nakamura, a former Hitachi executive. He supports the idea of lowering Japanese government bond (JGB) buying but argues that such a decision should be made after assessing growth and inflation prospects in the bank’s quarterly Outlook Report to be issued after the July 30-31 meeting. In March, Nakamura was one of the two members who dissented in a vote to end the negative interest rate policy and set the overnight rate target above zero.
“Regarding the purchases of Japanese government bonds, CP (commercial paper) and corporate bonds, the bank will conduct purchases in accordance with the decisions made at the March 2024 MPM (monetary policy meeting),” the bank said, repeating its statement issued after the previous meeting in April.
The board also decided that “it would reduce its purchase amount of JGBs thereafter to ensure long-term interest rates would be formed more freely in financial markets” as part of its move to gradually normalize its monetary policy after 11 years of large-scale easing. “It will collect views among market participants and at the next MPM, will decide on a detailed plan for the reduction of its purchase amount for the next one to two years or so.”
Governor Kazuo Ueda stressed that the bank “will not use” the reduction as an “active” monetary policy adjustment tool and it will carry “no or minimized monetary policy feature.”
“Monetary policy adjustment will be done mainly through short-term interest rates,” he told a post-meeting news conference, repeating his conviction.
Ueda said the board’s decision fell short of specifying by how much the bank should reduce its JGB purchases because “we wanted to make a gentle move, but that doesn’t mean it’s going to be a small reduction. We will reduce at a suitable pace.” Asked what would be an appropriate pace to match the economic and financial conditions, Ueda said bank officials will compare notes with market participants for the next month and decide at the July meeting.
It will take years to trim the bank’s asset holdings to a neutral level, Ueda said, denying that a slower pace of JGB purchases would be quantitative tightening.
Market participants expect the BOJ to raise the overnight rate again in July or September, and possibly one more time by year-end, barring any sharp downturn in economic growth. Ueda wouldn’t confirm or deny whether a July rate hike is possible, saying it will depend on the data that will become available.
At the March meeting, the bank decided to no longer target the yield on 10-year Japanese government bonds (JGBs), which had been capped at around 0.1%, but also decided to continue its purchases of JGBs “with broadly the same amount as before,” which is about 6 trillion yen a month. In case of a rapid rise in long-term rates, the bank said at the time that it would “make nimble responses by, for example, increasing the amount of JGB purchases and conducting fixed-rate purchases of JGBs.”
In March, the board also decided unanimously to stop new purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITS), and discontinue the purchases of commercial paper and corporate bonds in about a year by reducing them gradually. The bank used those large-scale asset purchases to support market and economic sentiment.
Since the short-term rate is close to zero, bank officials have noted that the monetary conditions will remain accommodative for now, but they have also acknowledged the negative impact of the weak yen on high import costs, which is partly due to the outlook that interest rates in Japan will stay well below those in the U.S., keeping the dollar’s relative strength.
“Japan’s economy is likely to keep growing at a pace above its potential growth rate (estimated by the bank to be zero to 0.5%), with overseas economies growing moderately and as a virtuous cycle from income to spending gradually intensifies against the background of factors such as accommodative financial conditions,” the BOJ said, repeating its recent assessment.
Looking ahead, the bank also repeated its long-held assessment that “there are extremely high uncertainties” surrounding Japan’s economy including developments in overseas economic activities and prices, commodity prices as well as domestic firms’ wage- and price-setting behavior. “Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices,” the BOJ said, repeating its past statements.
In its Outlook Report issued in April, the BOJ largely maintained its latest inflation outlook that the year-on-year increase in the core CPI (excluding fresh food prices) is likely to be in the range of 2.5% to 3.0% for fiscal 2024 and then be at around 2% for fiscal 2025 and fiscal 2026.