Bank of Japan keeps yield control policy unchanged

TOKYO (Reuters) – The Bank of Japan on Wednesday maintained ultra-low interest rates, including its 0.5% cap for the 10-year bond yield, defying market expectations it would phase out its massive stimulus programme in the wake of rising inflationary pressure.

MARKET REACTION:

The Japanese stock market cheered the BOJ’s decision with the Nikkei share average finishing the day 2.5% higher, its highest close in a month.

Yields on 10-year Japanese government bond plunged as much as 14 basis points to 0.36% at its lowest point, which would have been the biggest one-day decline since September 2003, before edging back up to 0.41%

The yen weakened after the announcement, though later regained some ground. The dollar rose as much as 2.7% but was last 1% higher at 129.38 yen.

Here are some comments from experts:

SPHIA SALIM, HEAD OF EUROPEAN INTEREST RATES STRATEGY, BANK OF AMERICA, LONDON

“There’s a little bit of a relief from the BOJ not acting because the Japan swaps market and futures market were definitely pricing the potential for a change in the target, if not an abandonment of the YCC. So Treasuries in particular are reacting to the non-event”

It is starting to become quite difficult for the BOJ to maintain the current target.

KENNETH BROUX, SENIOR FX AND RATES STRATEGIST, SOCIETE GENERALE, LONDON

“We came into today with markets positioning for more yen strength based on a change in position from BOJ. The BOJ today changed the direction of travel for dollar/yen but that rally has been sold. The dollar is broadly weaker in the last hour (the Australiand dollar is back above $0.7) thanks to positive risk sentiment which is also helped by the BOJ’s decision to keep monetary policy easy.

“The message from Kuroda and the BOJ is ‘we don’t need to urgently change policy settings because inflation is still temporary. The loan progamme for banks should help keep the rate on the 10 year Japanese government bond below 0.5% (the BOJ’s target)”

DUNCAN MACINNES, INVESTMENT DIRECTOR, RUFFER, EDINBURGH: 

“There’s now a growing consensus that it’s a case of when, rather than if, they let the peg go.” 

“We do now, I think, have a reasonable degree of confidence that the groundwork has been laid that this will be put to bed… and the new governor who comes in, which will be first week in April, will either immediately change the policy or the policy will already be changed by the time they get there, because it’s becoming unsustainable.”

NIELS CHRISTENSEN, CHIEF ANALYST, NORDEA, COPENHAGEN

“We see higher wages in Japan and that’s an indication that the inflation outlook is different this time. It’s realistic to expect tightening in the future but probably more likely after Kuroda steps down at the end of March. The downtrend in dollar-yen is still intact. We’ll likely see a lower dollar-yen going forward but for now we might see some range trading until we get more data on the inflation outlook.”

SAISUKE SAKAI, SENIOR ECONOMIST, MIZUHO RESEARCH AND TECHNOLOGIES, TOKYO:

“If I were Kuroda, I would have changed YCC – or scrap it altogether – this time, so that I could have a serene March policy meeting, the last rate-review for Kuroda.”

“We need to scrutinise why the BOJ didn’t change the tweak, after the December surprise which was meant to fix the bond market functionality. On that logic, the market functionality has not recovered – Kuroda will be questioned about the consistency.”

VINCENT TSUI, ASIA ANALYST AT GAVEKAL RESEARCH, HONG KONG:

“The market has been pushing for the BOJ to abandon its yield curve control program and the BOJ’s decision on Wednesday simply fended off such speculation and sent the yen weaker.”

“Overall, the BOJ decision demonstrates that the twist in YCC last time was technical in nature.”

TAKESHI MINAMI, CHIEF ECONOMIST AT NORINCHUKIN RESEARCH INSTITUTE, TOKYO:

“A concern is how much 10-year JGB yields will rise if the BOJ gives up its yield curve control policy. Would it settle around 1% or jump to about 2% all at once? If the YCC is ended, there could be turmoil in the economy and markets. (…) It remains hard to see how the BOJ will move towards an exit.”

ANDERSON ALVES, MARKET ANALYST AT ACTIVTRADES, BRAZIL:

“The decision defies the market narrative for the BOJ to consider abandoning the policy to restore bond-market liquidity, which is turning JBGs into a “paralysed market” as bond traders rely more on the BoJ’s daily auction operations to supply liquidity.”

“After today’s decision, it will be very hard for the BoJ to keep its policy unchanged as the current stance is distorting the bond market pricing – spreads between the JGBs and swap markets are getting even wider.”

“Speculators are likely to increase their hawkish bets on a policy shift from the BOJ. The policy price action shows that the current framework could fuel another unwelcome plunge for the Yen that could inflate the cost of raw material imports.”

TORU IBAYASHI, HEAD OF JAPANESE EQUITIES RESEARCH AT UBS SUMI TRUST, JAPAN:

“The move is neutral for Japanese equities as we expected there will be no move this time. The BOJ needs to control the monetary policy leadership. If the BOJ responded to the market’s expectation, then the market will expect even more when it comes to the reality.”

“We don’t think the BOJ is going to be more dovish than the current status. It is on the way of financial policy normalization. USD/JPY is at 127-128, (and) it is much stronger than a few months before; it doesn’t have much need to change the policy this time. The BOJ needs a bit more time to make next move.”

“But there are expectations that a further YCC policy change may survive. Therefore, among equities, we think Japanese financials sector will have a rerating of valuations over the next 3-6 months.”

EUGENE LEOW, SENIOR RATES STRATEGIST, DBS, SINGAPORE:

“Markets were positioned for a shift but that did not play out. However, speculation on further BOJ shifts is unlikely to be quelled so easily.”

NOBUYASU ATAGO, CHIEF ECONOMIST AT ICHIYOSHI SECURITIES, TOKYO:

“I think there was no other choice for the result to become like this… If BOJ tried to do the same thing as in December by widening the long-term yield band, they can’t hold on to their directive of keeping 10-year yields at around 0%. It would no longer be possible for the bank to say it wants to keep those yields around 0%.”

“But the problem of increased side effects remains… Market liquidity is steadily declining.”

“Those side effects will continue or may even strengthen going forward and under such conditions, the market mechanism may break. So close tabs need to be kept on whether the BOJ really has enough reason to keep the 10-year interest rate at 0%.”

SHOICHI ARISAWA, GENERAL MANAGER OF INVESTMENT RESEARCH AT IWAICOSMO SECURITIES, OSAKA:

“I think the stock market will remain unstable going forward because speculation that the BOJ will tweak its policy will continue. That could escalate when the new governor of the bank will be announced and towards the policy meeting in March.”

“The Nikkei futures rose right after the BOJ’s announcement but I think it was overshot.”

BART WAKABAYASHI, BRANCH MANAGER AT STATE STREET, TOKYO:

“I think there was a lot of underlying messaging in Wednesday’s result. Not only the result itself, the (early) timing of the release — it all seems very scripted. I think that they were making a very definitive point to the market: ‘We’re here to do what we said we’re going to do. We don’t want some crazy speculation, we want to destroy speculation.”

“One of the comments that stuck out was ‘we will do everything and anything’, and it is just throwing it back at the market and saying: ‘We all just better chill out.’ I think it was just a reaction to the market getting too far ahead of itself and trying to bring some adults to the table.”

MOH SIONG SIM, CURRENCY STRATEGIST, BANK OF SINGAPORE, SINGAPORE

“The can has been kicked down the road and the attention will shift to the next meeting. It’s a question of when, not if.”

CHARU CHANANA, MARKET STRATEGIST, SAXO MARKETS, SINGAPORE:

“I think the speculations will still continue. We have a lot of event risks on the horizon, with nominations for the new BOJ chief due on Feb. 10, followed by the spring wage negotiations in March and the announcement of new BOJ leadership in April.”

HIROAKI MUTO, ECONOMIST AT SUMITOMO LIFE INSURANCE CO, TOKYO:

“The outlook report raised expected inflation rates to near 2%, with some comment added on heightening inflation expectation. There could be a tweak, including a total scrapping of YCC under the new BOJ governor.”

“I don’t see another change in the March meeting because the government will reportedly announce the new BOJ leadership in mid-February, making the incumbent regime a lame-duck. Perhaps they might announce a review of the side-effects of the current policy though.”

“Amendments to the funds-supplying operation terms are minor and not substantial; they are not something signaling a future policy shift.”

VISHNU VARATHAN, HEAD OF ECONOMICS AND STRATEGY AT MIZUHO BANK, SINGAPORE:

“It shouldn’t have surprised. Back in December, Governor (Haruhiko) Kuroda already said it’s not a regular thing (regarding) the adjustment of the band … Markets bulldozing the base case to be a further expansion or the extremists out there talking about abandonment, probably did not consider that Governor Kuroda would have thought about credibility issues first.”

“Markets might have taken a bit of a blow and would probably be nursing that … but given that Governor Kuroda is going to handover in April, that means the ground remains somewhat fertile for speculation.”

KEISUKE TSURUTA, FIXED INCOME STRATEGIST AT MITSUBISHI UFJ MORGAN STANLEY SECURITIES, TOKYO:

“I feel like we were sidestepped by the BOJ. Investors will probably start buying bonds (after the market opens) but the buying will be limited because there may be another move by the BOJ in the future as the yield curve remains distorted.”

CHRISTOPHER WONG, CURRENCY STRATEGIST AT OCBC, SINGAPORE:

“I rather they abandon, or don’t do anything at all.”

“With expectations running high, a no move would disappoint JPY bulls and weakness can return. But this is likely to be temporary as focus shifts to next MPC in March when Kuroda chairs his last.”

TARECK HORCHANI, HEAD OF DEALING, PRIME BROKERAGE AT MAYBANK SECURITIES, SINGAPORE:

“As expected by most economists, BOJ maintained its yield curve control and the previous move to widen the trading band was more to create a more efficient market, which didn’t work as the market expected a change of policy and pushed BOJ to buy even more bonds.”

“The knee-jerk reaction has been a reversal in the USD/JPY short position ahead of the BOJ meeting and pushing USD/JPY 2% higher at 130.50.”

(Reporting by Rae Wee, Tom Westbrook and Ankur Banerjee in Singapore; Junko Fujita, Kantaro Komiya and Daniel Leussink in Tokyo; Summer Zhen in Hong Kong; Harry Robertson, Sam Indyk and Alun John in London Editing by Rashmi Aich)