Bank of Japan keeps ultra-low rates, dovish policy guidance
The Bank of Japan maintained ultra-low interest rates and dovish policy guidance on Thursday, reassuring markets that it will continue to swim against a global tide of central banks tightening monetary policy to combat soaring inflation.
Here are some analysts’ views on the move and market reaction:
SHOTARO KUGO, ECONOMIST, DAIWA INSTITUTE OF RESEARCH, TOKYO
“On JGB market, while the 10-year yield has hit the (BOJ’s upper limit) 0.25%, hedges betting on the breakdown of the 0.25% cap may not gain momentum this time as the BOJ has won the previous battle against overseas funds earlier this year.
“On two new board members Takata and Tamura: “we confirmed they are not someone like (former member Goushi) Kataoka, who was a die-hard reflationist. Although the BOJ’s decision-making has been stable even with the outlier like Kataoka, this time the board passed the decision by unanimous voting. The board is unlikely to disagree in near-term going forward, unless the 2% inflation target is stably met to prompt the discussion of tightening.”
SHIGETO NAGAI, HEAD OF JAPAN ECONOMICS, OXFORD ECONOMICS, TOKYO
“The weakening of the yen has been increasingly painful due to rising imported costs, especially for low and middle-income households and small companies with limited pricing power.
“However, we believe that the BOJ will never allocate monetary policy for the FX rate adjustment and will stick to the YCC policy. With little prospect of conducting FX market intervention in an effective manner, the government has no choice but to mitigate the damage from the weak yen through fiscal support, such as subsidies to contain commodity prices and cash benefits to low-income households … Even after Governor Kuroda leaves office in April 2023, the BOJ has little incentive to pursue policy normalisation.”
MASAYUKI KICHIKAWA, CHIEF MACRO STRATEGIST, SUMITOMO MITSUI ASSET MANAGEMENT, TOKYO
“The outcome of the BOJ meeting was pretty much completely in line with expectations.
“Japan is in a kind of unique position in terms of wage growth and demand-supply conditions in the labor market, and the trend of inflation. The labor market is much less tight than in the U.S., for example. There is no visible, strong pressure on wage growth. There is some upward pressure on consumer prices, but it’s mostly coming through the exchange rate.
“If the yen continues to decline, then the BOJ may begin to consider the impact of a cheaper yen on inflation. But we are still a little bit far from that point.
“The most important thing is how the foreign-exchange rate reacts to that contrast in monetary policy between the U.S. and Japan.
“The volatility in the dollar-yen might be related to positioning, or there might be some cautiousness among traders regarding the possibility of intervention, particularly in the Tokyo market, so I will be watching what happens in London and New York.”
ALVIN TAN, HEAD OF ASIA FX STRATEGY, RBC CAPITAL MARKETS, SINGAPORE
“What’s more important now that BOJ has indeed shown that they are keeping the policy unchanged for now, is the press conference that’s coming up … that’s basically the next event now for the yen, to see if there’s any change in Kuroda’s policy.
“For the upside pressure on dollar/yen to end – one of the things that must happen is that the BOJ has to move towards policy normalization, and they’re not doing it. Essentially the only thing that is going to stop dollar/yen from reaching 150 is if there is intervention, but even with intervention, It’s just going to be a temporary respite, because it doesn’t change the fundamentals.”
HIROSHI SHIRAISHI, SENIOR ECONOMIST, BNP PARIBAS SECURITIES
“With today’s decision, the BOJ made the most dovish move one could think of. What surprised the most was its decision to extend the coronavirus special lending programme. As it’s tied with the BOJ’s forward guidance, it made it difficult, if not impossible, to alter monetary easing for the foreseeable future.
“As such the central bank’s move has bolstered expectations that it will stick to easing policy at least until Kuroda serves out his term next spring.
“The BOJ appears determined to stick to easing policy regardless of the yen weakening. Even if the BOJ raises interest rates by raising rates by 10 basis points or so at a time the Fed hikes rates by 75 basis points, it would be nothing but a drop in the bucket. Therefore, the BOJ has no choice but continue with monetary easing despite the yen weakening.”
NAOMI MUGURUMA, CHIEF BOND STRATEGIST, MITSUBISHI UFJ MORGAN STANELY SECURITIES, TOKYO
“The contrast between the Fed and BOJ has become clear. The Fed will prioritise beating inflation even at the cost of cooling the economy, where as the BOJ will patiently maintain ultra-easy policy until inflation stably hits 2%.
“It’s notable that the BOJ decided to extend part of its pandemic-relief funding programme until March next year. It suggests the BOJ won’t change its forward guidance throughout the period. It also leaves the impression there will be no change in monetary policy during Kuroda’s remaining term.”
TAKAYUKI MIYAJIMA, SENIOR ECONOMIST, SONY FINANCIAL GROUP, TOKYO
“The outcome was within the expectations.
(On 10-year government bond yields staying at 0.25% of the BOJ’s upper limit)” Japanese government bond market is not normal with the distorted yield curb. But the BOJ would not abandon its yield curb control under the leadership of Kuroda. This is going to be a task for the new governor. We will not have any new market moving catalysts until we learn about who is going to be the new governor.”
TOHRU SASAKI, HEAD OF JAPAN MARKETS RESEARCH, J.P.MORGAN, TOKYO
“The BOJ’s policy stance has not changed at all. They still sound dovish. Forward guidance is still basically the same.
“There could be concern about intervention, or even a rate check by the BOJ, I don’t actually know the reason (for the sharp pullback in dollar-yen after its surge to a new 24-year high), but judging by the price action that seems possible. It could also just be the result of market illiquidity.
“Because of this price movement, the market will be nervous. There will be some volatility for a while. But eventually, over the medium term, the weak yen trend will continue.
“The 1998 peak was at 147.60, so the market will be looking at that level.”
TARO SAITO, EXECUTIVE RESEARCH FELLOW, NLI RESEARCH INSTITUTE, TOKYO
“The decision was just as expected – BOJ’s inaction has long been expected, and the ongoing (currency) market moves are driven mainly by the U.S. monetary policy shifts.
“As Japan’s economy remains at a low level of output and the (overall) consumer inflation of 3% is not as high as 8-9% seen in the U.S. and Europe, any monetary tightening aimed at lowering inflation and cooling the economy is inappropriate for Japan. But whether yield curve control is an appropriate policy is a different problem – I found it problematic that the YCC has reduced the options available for the BOJ in a situation like now.”
SHIGETOSHI KAMADA, GENERAL MANAGER – RESEARCH DEPARTMENT, TACHIBANA SECURITIES, TOKYO
“The outcome was in line with our expectations. It became clearer that the Bank of Japan will continue to be committed to support the economy. The yen fell to 145 yen to the dollar for a moment (after the announcement). Unstable move of the yen increases uncertainties of Japanese stocks. Even as some companies benefit from the weak yen, some suffer as costs increases so in total that is going to be a worry.
“For a while Wall Street move will remain as the main market cue for the Japanese stock market.”
HIROAKI MUTO, ECONOMIST, SUMITOMO LIFE INSURANCE CO, TOKYO
“The BOJ was aware that an announcement like this should surely prompt a weak yen beyond 145 per dollar.
“Although the statement says “we must be vigilant at financial, currency market moves”, looking at how the BOJ communicates, it doesn’t seem they are seriously mindful of that. They might be thinking a weak yen beyond 145 level is not a bad thing that will bring negative impacts to the economy.”
TAKESHI MINAMI, CHIEF ECONOMIST, NORINCHUKIN RESEARCH INSTITUTE, TOKYO
“While the monetary policy decisions in the United States and Japan were both as expected, U.S. interest rates actually rose so that caused the yen to weaken somewhat. That trend is likely to continue.
“The difference in direction of U.S. and Japan’s monetary policy has caused the yen to depreciate…. Unless U.S. interest rates peak, there won’t be any relief in the pressure on the yen to depreciate and interest rates to rise.
“It’s true that Japan’s economy is weak…. The BOJ is right in maintaining the status quo, considering the risk that raising interest rates pose and the harm that would do to current conditions.”
SAKTIANDI SUPAAT, REGIONAL HEAD OF FX RESEARCH & STRATEGY, MAYBANK, SINGAPORE
“I think the next level at 147 is a possibility. Going forward, yen weakness I think it’s built in relatively to the dollar, especially with the rate differential being one of the big drivers.
“Eventually, an intervention may come. If it’s too rapid a move toward 147 and beyond, I think the intervention layer will come in. The verbal warnings have come in, the rate checks have come in, the next level would definitely be intervention.”
YASUNARI UENO, CHIEF MARKET ECONOMIST, MIZUHO SECURITIES, TOKYO
“The BOJ’s decision may have been taken into account the fact that the Fed announcement overnight on raising interest rates by 0.75% had caused little reaction in the currency market. As it turned out, the both central banks’ decisions were pretty much factored into the currency market.”
“We’re closely watching what Kuroda may say about recent sharp yen weakening lately. He has said lesser about any merit of the weak yen recently out of consideration towards public sentiment against rising costs of living.”
“Kuroda will probably underscore concerns about impacts from the weak yen on the economy, although he will steer clear of directly commenting on currency policy which falls in the jurisdiction of the Ministry of Finance, not the BOJ.”