Bank of Japan keeps rates low as Kuroda sticks to script in swan song meeting

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The Bank of Japan (BOJ) kept interest rates ultra-low on Friday and refrained from making changes to its controversial bond yield control policy, leaving options open ahead of a leadership transition in April.

While most analysts were broadly expecting the decision, the decision sent the yen and local bond yields lower as some investors bet on the resignation of the central bank governor. Haruhiko Kuroda changing yield curve control (YCC) at his last policy meeting.

Kuroda leaves bank with mixed legacy: His big stimulus is credited with pulling the economy out of deflation, but pressures bank profits and dampens market activity with long-term low interest rates.

At its two-day meeting that ended on Friday, the BOJ kept its short-term interest rate target at -0.1% and that for the 10-year bond yield around 0%.

It also left unchanged a fixed band around the 10-year yield target that allows the yield to rise to 0.5%.

“While we have not ruled out the possibility of a band extension to ensure a smooth leadership transition, Kuroda appears to have avoided a sharp increase in JGB’s output by the end of the fiscal year,” said Norihiro Yamaguchi, senior economist at Oxford Economics. .

“There is a cost in the decision to maintain policy levels. The BOJ had to continue its massive JGB purchases to stop speculation about further YCC tweaks, which will worsen market liquidity,” he said.

The yen was last down 0.49% at 136.78 against the dollar, trimming losses after a knee-jerk plunge of as much as 0.6% following the surprise decision.

The benchmark 10-year JGB yield pulled back quickly from the BOJ’s 0.5% peak to stand at 0.445%, while the Nikkei short-term average lost 1.23% due to declines in bank shares.

Many investors expect the central bank to suspend YCC when Kuroda’s successor, Kazuo Ueda, takes the helm in April.

“Ueda will not move suddenly and will probably wait until his second meeting in June, in changing forward direction and YCC,” said Masamichi Adachi, senior Japan economist at UBS Securities.

“The BOJ is likely to abandon its 10-year bond yield target, while maintaining negative interest rates, to arrest distortions in the yield curve,” he said.

For now, the BOJ kept its guidance on the future policy path confidential, saying it expects short- and long-term policy rates to remain “at current levels or more lower than them”.

The BOJ kept unchanged its view that the Japanese economy is likely to recover. But it took a worse outlook than in January for output and exports to say they were “moving forward” in a sign of recent weakness in factory production and overseas demand.

In January, the central bank said that production and exports were increasing as a trend.

With inflation above its 2% target, the BOJ was forced to increase bond purchases to protect the 0.5% cap set for the 10-year bond yield – at the cost of shifting the shape of the yield curve and cause disorder in the bond. market.

Kuroda has repeatedly said that consumer inflation, which is now running at two rates faster than the BOJ’s 2% target, will start to slow as the impact of spikes in the past in declining fuel and raw material prices.

Data released on Friday showed that Japan’s wholesale prices rose 8.2% in February from a year earlier to mark the second straight month of year-on-year slowdown, raising the prospect of a rebound consumer inflation will moderate in the coming months.

In parliamentary hearings last month, Ueda raised Kuroda’s calls to maintain the ultrasound policy. But the incoming governor said he had ideas on how to leave low rates, and was open to the idea of ​​re-evaluating the current policy framework.

A majority of economists polled by Reuters expect the BOJ to end YCC this year with half saying Ueda will tweak the policy within three months.

The upper house of the parliament on Friday approved the appointment of the government Ueda and his two new deputy heads, Shinichi Uchida and Ryozo Himino, completing the confirmation of the new BOJ leadership.

Ueda will chair its first policy meeting on April 27 to 28, when the board will issue new quarterly growth and price projections extending through fiscal 2025.

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