Bank of Japan vows limitless defence of yield target

div classBodysc17zpet90 cdBBJodivpSINGAPORE Reuters – The Bank of Japan on Thursday maintained its massive stimulus programme and a pledge to keep interest rates low, reinforcing its resolve to support a fragile economy.p

pThe central bank also said it will offer to buy unlimited amount of 10year government bonds to defend an implicit 0.25 yield cap around its zero target every market day.pdivdivdiv classBodysc17zpet90 cdBBJodiv

pThat is a stark contrast with tightening almost everywhere else and the decision drove the yen to a twodecade low on the U.S. dollar, while Japanese government bonds rallied.p

pHere are some analysts views on the move and market reaction:p

pBART WAKABAYASHI, COBRANCH MANAGER, STATE STREET, TOKYOp

pThe key announcement is the commitment to conducting fixedrate operations every day. I think they are trying to make the point here that were ready to act at any second.p

pTheyve quadrupled down on their commitment to this.p

p“The BOJ is not promoting a weak yen, but their policy is in a way supporting a weak yen…I think most people would have agreed 130 is in play, but now its a foregone conclusion. I would bet that London will come in and smack dollaryen higher.”p

pRAY ATTRILL, HEAD OF FX STRATEGY, NATIONAL AUSTRALIA BANK, SYDNEYp

p“Effectively the Bank of Japan has doubled down on its yieldcurve control target by its offer to buy bonds at 0.25 every day. There no longer needs to be a willthey, wontthey.”p

pTOM LEARMOUTH, JAPAN ECONOMIST, CAPITAL ECONOMICSp

p“The decision is unlikely to solve the BoJs dilemma.”p

pAs it comes under further pressure from continued rises in global bond yields, we think the bank will eventually give itself some breathing space by widening the band from ±0.25 to ±0.50. That could happen at the next meeting on 17th June.p

p“That said, the full abandonment of yield curve control is a remote prospect.”p

pTAKESHI MINAMI, CHIEF ECONOMIST, NORINCHUKIN RESEARCH INSTITUTE, TOKYOp

pIf the BOJ delivers the kind of policy its doing, pressures leading to depreciation of the yen will rise. The Federal Reserve in the United States may raise interest rates by 50 basis points next week, while the BOJ will defend the 0.25 yield level on 10year Japanese government bonds. p

p“There‘s no sign at all that prices are stably going to rise by 2 so everyone is wondering whether it’s really good to keep going as it is. Markets could attack the BOJs unlimited bond buying.” p

pMASAHIRO ICHIKAWA, CHIEF MARKET STRATEGIST, SUMITOMO MITSUI DS ASSET MANAGEMENT, TOKYOp

pAs the BOJ maintained its current easy policies, the market understood it as a signal that the BOJ would not care about a weak yen. With the Feds upcoming rate hike next week that will further widen the interest rate gap between the U.S. and Japan.p

p“BOJ Governor Kuroda will likely repeat his previous views” at press conference later in the day, “with no surprise expected, which makes a yen shortening position more reasonable.”p

pHIROAKI MUTO, ECONOMIST, SUMITOMO LIFE INSURANCE CO, TOKYOp

pThe BOJ showed that it will fight the rising JGB yields by maintaining the current policy with zero concession.p

p“The BOJ will not surrender and keep fighting to defend its yield curve control.”p

pSHOTARO KUGO, ECONOMIST, DAIWA INSTITUTE OF RESEARCH, TOKYOp

pThe BOJs announcement to buy bonds at 0.25 every business day entails a strong announcement effect no matter if it really buys or not. p

p“It implied the BOJ would not allow any speculation for policy revision to emerge at future meetings.”p

pKIYONG SEONG, LEAD ASIA MACRO STRATEGIST, SOCIETE GENERALE, HONG KONGp

pIt confirms the BOJs dovishness and that has been detrimental to the Japanese yen, which is suddenly falling and dragging on most of the north Asian currencies.p

p“Even though the market already anticipated the BOJ would remain accommodative, finding out again has led to an exaggerated market move again.”p

pSEAN CALLOW, SENIOR CURRENCY STRATEGIST, WESTPAC, SYDNEYp

pAfter weeks of confusing comments about the yen from government officials, the BOJ has cut through with a clear message – the global inflation surge is exJapan, so zero rates will remain.p

p“Dollaryen may be a round number but it cannot be a red line, with attention likely to turn quickly to 135, the 2002 high. The yen is not being ignored, but it is mostly a side effect for the BOJ.”p

pHIDEO KUMANO, CHIEF ECONOMIST, DAIICHI LIFE RESEARCH INSTITUTE, TOKYOp

pThe dollaryen reacted very sharply. Investors may test the pair to break above 130 yen.p

pI wonder why the BOJ had to clarify its stance on fixedrate operations today, which likely triggered the yen selloff. Investors must be closely watching what Kuroda may explain about it and his previous stance that weak yen is good for economy.p

pWhat makes me worry is the prospect of the Feds move towards quantitative tightening at its meeting next week during Japans Golden Week holidays. That could trigger even sharper yen falls amid a thin trade. p

p

pp Reporting by Japan bureau & Tom Westbrook in Singapore. Editing by Shri Navaratnamp

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