The Bank of Japan has announced its intention to release a plan on winding down its purchases of Japanese government bonds (JGBs), sending the yen down over what the market saw as dithering on the reduction of its massive balance sheet.
After a two-day policy meeting that ended Friday, the central bank said it will wait until after the next meeting is concluded in July before it announces its proposed timetable for the winding down of government bond purchases.
Until then, the bank will maintain its purchases of bonds at a pace of about ¥6 trillion a month, the central bank said.
At the meeting, the policy board also voted to maintain the short-term policy xrate target, which is in a range of zero percent to 0.1%.
After the announcement, the yen tanked, jumping from about ¥157 to the dollar to about ¥158 to the dollar, with traders and strategists saying that the lack of a solid announcement added to risk in the market.
The yen, which hit about ¥158.25 to the dollar during the day, has been closing in on recent lows and is also close to levels not seen since the 1980s.
It firmed up later after the central bank added to its initial comments and clarified the magnitude of the reduction in bond buying.
“The scale of reduction will likely be significant, but we would like to make a plan with a specific amount and pace while collecting views from market participants,” BOJ Gov. Kazuo Ueda said during a news conference after the policy meeting.
The goal of the reduction of bond purchases is to lessen central bank control of long-term rates and allow for the market to lead in establishing interest rates.
Under a decadeslong ultraloose monetary policy, the central bank kept long-term rates around zero percent through the combination of negative policy rates and bond buying.
Since the central bank ended its negative-rate policy in March and upped rates for the first time since 2007, the yield on the benchmark 10-year JGB has been rising. Late last month, it climbed to a 13-year high of 1.1%.
Even after scrapping the negative-rate policy, the BOJ said it remained committed to buying JGBs at the same pace to prevent a rapid increase in interest rates.
While some economists had predicted that the central bank would increase rates in July, such a scenario seems unlikely now, according to Saisuke Sakai, a senior economist at Mizuho Research and Technologies.
“Based on today’s announcement, the main topic for the July meeting is about the details of cutting the bond purchases,” he said.
The bank will want to see how that will affect the economic situation before deciding whether to raise rates, Sakai said.
He added that a rate hike could take place in September when the central bank will have more data on the wage growth and price trends.
The central bank’s move might drive long-term rates higher, but it may not turn the tide in the currency markets given rates elsewhere.
The U.S. Federal Reserve held its key interest rate unchanged on Wednesday and indicated that it expects just one rate cut this year, compared with the previous projection of three cuts.
As a result, the interest rate gap between the U.S. and Japan will not likely narrow as much as expected and the yen will remain under pressure.
Ueda said that while the central bank is carefully watching the impact of the weak currency, he stressed that the decision to cut bond buying is to give more freedom to the market to guide interest rates, rather than focusing on the yen’s decline.
According to comments released by the BOJ after the conclusion of its meeting, the Japanese economy is recovering at a moderate pace, but it noted that the halt of some car shipments is a potential negative.
Automakers have suspended shipments and production of some vehicles after disclosing that they had falsified some safety-test data.
Underlying inflation is anticipated to rise gradually, with wage growth and price increases expected to be in line with the central bank’s price-stability target in the coming years.
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