The BOJ reaffirms its commitment to ultra-easy monetary policy, precipitating a currency sell-off.
TOKYO (Reuters) -The Bank of Japan reaffirmed its commitment to maintaining its enormous stimulus programme and to maintaining ultra-low interest rates on Thursday, prompting a new sell-off in the yen and a rise in government bonds.
As raw material prices rose significantly, the BOJ said it would buy an unlimited amount of 10-year government bonds every day to keep inflation from rising more than 0.25 percent above its goal of 0 percent.
Despite the fact that inflation in Japan is expected to rise closer to the central bank’s 2% target, the BOJ is sticking with its zero-rate policy. This puts it at odds with other countries that are tightening monetary policy.
“The most significant statement is the firm commitment to daily fixed-rate operations,” said Bart Wakabayashi, co-branch manager of State Street (NYSE:STT) Bank in Tokyo.
“I believe they’re attempting to convey the message here that we’re prepared to act at any moment. They have tripled their devotion to this cause.“
For the first time since 2002, the yen fell below the psychological level of 130 to the dollar. The BOJ said that it would keep its monetary policy “accommodative.”
Japanese 10-year government bond yields fell to a more than three-week low of 0.215 percent immediately after the BOJ decision.
Markets are reacting to increased speculation that the BOJ will let longer-term rates rise even more or change its dovish policy guidance in response to yen declines. Some lawmakers fear that a weaker yen will hurt the economy by raising the cost of imported goods.
Haruhiko Kuroda, the governor of the BOJ, said that Thursday’s decision reaffirmed the central bank’s commitment to not let rising international rates push up borrowing costs in Japan.
“What we want to prevent is a rise in Japanese long-term interest rates over 0.25 percent,” he added, maintaining his belief that a weak yen favours the country’s economy.
The BOJ maintained its -0.1 percent target for short-term interest rates and its commitment to keep the 10-year bond yield around 0%, as expected.
“The BOJ anticipates that short- and long-term policy interest rates will continue at current or lower levels,” the bank said in a statement, maintaining its earlier dovish advice from March.
INFLATIONARY PRESSURE IS INCREASING
The central bank anticipated core consumer inflation would reach 1.9 percent in the current fiscal year before easing to 1.1 percent in fiscal 2023 and 2024, indicating that it views current cost-push price increases as temporary.
However, the BOJ said that wage and price rises are expected to grow as the economy improves. This is because of rising inflationary pressures.
If underlying inflation rises even more, the central bank says, “medium- and long-term inflation expectations will rise even more.”
However, Kuroda said that he does not anticipate the BOJ to pursue an exit from ultra-loose policy in the near future.
“A favourable economic cycle is required to continue the escalation of inflation expectations. This will take time “‘He said.
Officials at the BOJ see changes in long-term pricing expectations as critical in determining whether inflation has become ingrained and justifies the withdrawal of monetary support.
Core consumer inflation, which reached 0.8 percent in March, is expected to rise to about 2% in April, but the rise will be mostly due to rising gas prices and the fading effects of previous cell phone charge cuts, not stronger salaries or demand.
According to some people, the markets may test the BOJ’s commitment to ultra-easy monetary policy by seeing if they can handle it.
“There is no indication that prices will grow by 2% steadily, and everyone is asking if it is really beneficial to continue on this path. Markets may retaliate against (the BOJ’s limitless bond purchases) “Takeshi Minami, head economist of the Tokyo-based Norinchukin Research Institute, agreed.
