By Max Sato
(MaceNews) – The Bank of Japan sent a clear message to financial markets late on Thursday that it is not following other major central banks in shifting gears toward tightening by announcing that it is conducting an unlimited fixed-rate long bond buying operation at 0.25%, the upper limit of its guidance range.
It is rare for the BOJ to send an advance notice on its market operation, which it said was scheduled to take place on Monday. It shows the bank’s determination to defend the upper end of its range of minus 0.25% to plus 0.25% for the yield on 10-year JGB. The BOJ is also trying to pre-empt market gyrations on Friday, when Japanese markets are closed for a public holiday. The BOJ move took on added significance after another hot US inflation reading later Thursday rattled financial markets.
The BOJ intervention will be the bank’s first fixed-rate operation since July 2018. At the time, the bank was allowing a range of minus 0.2% to plus 0.2% for the 10-year Japanese government bond yield, double the then unofficial range of minus 0.1% to plus 0.1%, which Governor Haruhiko Kuroda said should help recover the function of the tepid JGB market and make large-scale monetary easing more sustainable.
Expectations for multiple rate hikes by the Federal Reserve this year have triggered selling in US bond markets, sending a ripple effect to the JGB market where the 10-year yield has been rising toward 0.25%, the highest level since January 2016, just before the BOJ adopted a negative interest rate policy. After Thursday’s US consumer price report, markets increasingly expect the Fed to start raising rates with an aggressive 50 basis point move in March.
Kuroda told the Mainichi Shimbun daily in an interview published on Friday that the BOJ will stick to its accommodative policy stance to guide near-zero inflation toward its 2% target.
“Compared to the US and Europe, the pace of economic recovery in Japan is slower and the inflation rate is at 0.5%, so we don’t have to shrink monetary easing or switch to tightening and it is not happening at all,” he told the Mainichi.
In March 2021, the BOJ board decided to add new tools and tweaked existing schemes to make its monetary easing response “more flexible and nimble” in its prolonged battle to guide inflation toward its 2% target from around zero.
Among key items in its policy review, the BOJ made it clear that it was now allowing the 10-year yield on JGBs to fluctuate 25 basis points (0.25 percentage point) either side of the target level, which is currently around zero percent.
At its latest meeting on Jan. 17-18, the BOJ said it is maintaining its interest rate targets and main asset purchase program to continue supporting economic recovery from the pandemic-caused slump and guiding gradually rising inflation toward its 2% target.
No change in policy was expected as the bank in December decided to end parts of its anti-Covid special financing program aimed at supporting large firms, whose financial conditions have improved, while extending its feature of helping hard-hit small businesses, particularly those in the service sector.
The BOJ’s nine-member board decided in an 8-to-1 vote to maintain its current monetary easing stance under the yield curve control framework it adopted in September 2016, vowing to keep zero to negative interest rates “as long as necessary” to achieve its 2% inflation target in a stable manner.
Under the current framework, the BOJ is keeping the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent by buying “a necessary amount” of Japanese government bonds “without setting an upper limit,” and to keep the overnight interest rate at -0.1% by charging 0.1% interest on a part of cash reserves parked at the bank by financial institutions.