The Bank of Japan's basic stance is for long-term interest rates to be set by markets, Gov. Kazuo Ueda said on Saturday, offering no strong concern over a recent rise in the benchmark 10-year government bond yield to a 12-year high.
The remark suggests that the central bank likely won't ramp up bond buying to push down yields, and will scrutinize market moves to determine how soon it can start slowing purchases.
The central bank has said it will continue to buy government bonds at a pace of roughly ¥6 trillion ($38 billion) per month, but slow purchases at some point in the future.
"Our basic stance is for long-term interest rates to be set by markets," Ueda told a news conference after attending a gathering of the Group of Seven finance leaders in Italy, when asked about recent rises in Japan's long-term rates.
"We will closely watch market developments," he said.
The BOJ ended eight years of negative interest rates and other remnants of its radical monetary stimulus in March, including a policy that caps the 10-year bond yield around 0%.
But it pledged to keep buying bonds at the current pace for the time being to avoid the policy shift from causing an abrupt spike in bond yields and hurt a fragile economic recovery.
Having taken the first step toward policy normalization in March, Ueda has signaled the BOJ's readiness to keep raising interest rates and eventually slow its bond buying.
The BOJ also caught traders off guard with an unscheduled reduction in bond buying on May 13, a move markets took as a prelude to a full-fledged tapering of its bond purchases.
The hawkish signals have pushed up long-term interest rates with the benchmark 10-year bond yield hitting a 12-year high of 1.005% on Friday, exceeding the 1% mark that the BOJ used to defend with huge bond purchases until the March policy shift.
A Reuters poll showed nearly two-thirds of economists expecting the BOJ to start tapering the size of its bond buying by the end of July.
Markets are also focusing on any clues on when the BOJ could raise short-term interest rates from current near-zero levels.
Ueda said on Thursday that Japan's economy was on track for a moderate recovery, suggesting a slump in first-quarter gross domestic product alone would not keep the central bank from raising interest rates in coming months.
Ueda and Finance Minister Shunichi Suzuki visited the northern Italian city of Stresa to attend the two-day G7 finance leaders gathering that ended on Saturday.
At the meeting, the finance chiefs reaffirmed their commitment to warn against excessively volatile currency moves, language Japan sees as a green light to intervene in the market to arrest rapid falls in the yen.
The agreement followed new verbal warnings from Japan's top currency diplomat Masato Kanda, who told reporters on Friday that Tokyo was ready to step into the market "any time" to counter speculative yen moves that hurt the economy.
"We reaffirm our May 2017 exchange rate commitments," the G7 ministers said in a statement on Saturday after their meeting, in a nod to Japan's call on the group to reiterate its view on the need for currency market stability.
The G7 group has a long-standing agreement that excessive volatility and disorderly currency moves are undesirable, and that countries have authority to take action in the market when exchange rates become too volatile.
Tokyo has argued this agreement gives it freedom to intervene in the currency market to counter excessive yen moves.
"We're grateful the G7 reaffirmed its shared understanding on exchange rates. It's also reassuring for markets," Kanda told reporters on Saturday after the finance leaders' meeting.
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