Even amid a period of increased unpredictability on the part of the Bank of Japan, there were no surprises Wednesday as the central bank ended its two-day meeting with its dovish policies unchanged.
The BOJ said it will maintain its monetary easing policy — including the so-called yield curve control, buying unlimited amounts of 10-year Japanese government bonds (JGBs) to keep yields at around 0% — while allowing swings of plus or minus 50 basis points. The bank's short-term interest rate will stay at minus 0.1%, the central bank said, maintaining its outlier status amid a period of global inflation that has prompted its peers overseas to raise rates.
In its quarterly report, the central bank also revised its inflation outlook for the fiscal year ending in March, lifting it to 3% from 2.9%, as more companies are raising prices because of high import costs.
Market participants have become more sensitive to the BOJ’s moves ever since it made a surprise tweak to its monetary policy last month to allow wider fluctuations of long-term bond yields, shifting from a range of plus and minus 0.25 percentage points to 0.5 percentage points. That was seen as an effective rate hike, despite the earlier consensus among analysts that no change would be made.
The Bank of Japan’s decision to leave its main policy settings untouched Wednesday means “that it’s likely that the BOJ will make no more changes to its current monetary policy during (BOJ Gov. Haruhiko) Kuroda's term,” which ends in April, said Toru Suehiro, chief economist at Daiwa Securities.
Suehiro believes that the BOJ was actually reluctant to tweak its policy last month, but was probably pressured by the administration of Prime Minister Fumio Kishida, as many in the public were frustrated over the BOJ’s unchanging stance in the face of rising inflation.
Last month, Kuroda stressed that the policy tweak was not meant to be a shift from its ultraloose monetary policy, saying the central bank’s intention was to improve market functions to more smoothly spread out the effect of monetary easing.
Asked about progress on repairing market functions, Kuroda said Wednesday that the change was introduced just last month, so “it will still take time to evaluate the effectiveness, but I believe it will improve" through continuing to operate "in an agile manner."
Kuroda also said it is not necessary to allow wider movements of long-term yields than the currently set 0.5 percentage point range.
However, uncertainty over the fate of the current monetary policy will likely persist once Kuroda steps down.
“I think speculation that the BOJ might shift from its ultraloose policy will continue to be floating around among market participants,” Suehiro said.
On Wednesday, the yen’s value against the U.S. dollar plummeted, breaching the ¥131 mark — it had been around ¥128.5 prior to the BOJ announcement.
The policy modification last month had fueled speculation among investors ahead of the two-day meeting this week and boosted pressure on the BOJ, as the 10-year bond yields rose beyond the 0.5% cap a number of times.
To defend the ceiling, the BOJ has been purchasing a massive amount of JGBs, with this month already marking a monthly record high of about ¥17 trillion ($130.3 billion).
Because of the BOJ’s unpredictability, Japan’s monetary policy outlook is hazier, with the focus now shifting to whether Kuroda will introduce surprises at the policy meeting in March — his last one — and who will succeed him.
The government is considering proposing its candidate recommendations for the new governor to parliament on Feb. 10. The appointment will need to be approved by both chambers.
Current Deputy Gov. Masayoshi Amamiya and former Deputy Gov. Hiroshi Nakaso are among the names that have emerged in the media as possible replacements.
The selection of the BOJ governor can be an indication of how the government intends to manage the overall economy.
Because Kuroda’s monetary easing has been seen as a symbol of Abenomics, which was promoted by former Prime Minister Shinzo Abe, some economists have said that Kishida might seek an exit from that blueprint with the selection of a new BOJ governor who will normalize monetary policy — that is, unwind complex policies such as the yield curve control and the negative interest rate.
Some economists have also said that the BOJ modified the policy last month because it may be thinking that it was better to make a move while Kuroda is still in charge, so that it would be easier for a new governor to change course.
Information from Kyodo added
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