The Bank of Japan on Wednesday maintained ultra-low interest rates, including a bond yield cap it was struggling to defend, defying market expectations it would phase out its massive stimulus programme in the wake of rising inflationary pressure.
The surprise decision sent the yen skidding against other currencies as investors unwound bets they made anticipating the central bank would overhaul its yield control policy.
At a two-day policy meeting, the BOJ kept intact its yield curve control (YCC) targets, set at -0.1 per cent for short-term interest rates and around 0 per cent for the 10-year yield, by a unanimous vote.
Following are excerpts from BOJ Governor Haruhiko Kuroda’s comments at his post-meeting news conference, which was conducted in Japanese, as translated by Reuters:
CORE CONSUMER INFLATION
“”We expect core consumer inflation to slow below 2 per cent toward the latter half of fiscal 2023. When looking at trend inflation, we’ll likely see inflation gradually accelerate toward our price target due to improvements in the output gap, rises in medium- and long-term inflation expectations and higher wages. But we have yet to see prospects for inflation to stably and sustainably hit our price target.”
MAINTAINING ULTRA-EASY POLICY
“Uncertainty regarding Japan’s economy is very high. It’s necessary to support the economy with our stimulus policy, to ensure companies can raise wages. By maintaining ultra-easy policy, we will strive to achieve our price target stably and sustainably accompanied by wage hikes.”
ON WIDENING OF THE YIELD BAND
“We don’t need to further expand the band around our yield target….”
“It’s been not long since we decided on our measures in December. It will likely take some more time for the measures to start having an effect in fixing market function. With our flexible market operations, however, we expect market function to improve ahead.”
“YCC is, therefore, likely to be sustainable.”
“Japan’s economy is likely to grow above its potential for three straight years. This means wages and prices will be pushed up by robust demand … On the other hand, the upward pressure from import costs will gradually fade. We’ll have both sides affecting price moves.”
EXPANSION OF BOJ’s FUND-SUPPLY OPERATION
“This step will allow us to push down longer-term interest rates without directly affecting the supply and demand of the cash JGB market. We’d like to use this tool for various maturities, and in various ways.”
NEGATIVE RATES ON EXPANDED FUND-SUPPLY OPERATION
“We won’t rule out applying negative rates.”
CAN NEGATIVE INTEREST RATES BE ABANDONED BEFORE INFLATION HITS 2 per cent TARGET?
“We have a guidance pledging to keep interest rates at present or lower levels. That says it all.”
IS EXPANDED FUND-SUPPLY OPERATION A NEW TOOL FOR YCC?
“This scheme has been in place as a monetary policy tool. The expanded operation is an effective one. We’ve expanded this tool. But I don’t think our decision shows YCC is reaching its limit. In fact, this tool will help shape the appropriate shape of the yield curve.”
MASSIVE INCREASE IN BOND BUYING TO DEFEND YIELD CAP
“I don’t see a huge problem with the fact that the BOJ ramped up bond buying.”
“Unlike in the past, we expect wages to rise quite a bit, when listening to comments from the business and labour union executives. Winter bonus payments have been rising and corporate profits are at record-high levels… The pace of wage hikes is accelerating. But this is something we haven’t seen in the past… So we’re not 100 per cent sure (whether) wages will indeed rise.”