BOJ holds ultra-low interest rates, warns against sharp yen falls

TOKYO, June 17 (Reuters) – Bank of Japan maintained ultra-low interest rates on Friday and vowed to defend its ceiling on bond purchases with unlimited purchases, countering a global wave of money tightening in a demonstration of willingness to focus on supporting a lukewarm economic recovery.

The yen fell as much as 1.9% and bond yields fell after the decision, which was widely expected, but disappointed some market participants who speculated that the BOJ could give in to market forces and adjust its yield cap policy.

However, in a nod to the hit that the yen’s recent sharp fall may have on the economy, the BOJ said it must “look closely” at the impact exchange rate movements may have on the economy.

“Recent rapid falls in the yen increase uncertainty about the outlook and make it difficult for companies to set business plans. It is therefore negative for the economy and undesirable,” BOJ Governor Haruhiko Kuroda said at a news conference.

At the two-day political meeting that ended on Friday, the BOJ maintained its -0.1% target for short-term interest rates and its promise to guide the 10-year return around 0% with an 8-1 vote.

The central bank also adhered to its guidance on keeping interest rates at “current or low” levels, and stepped up a program to buy an unlimited amount of 10-year government bonds at 0.25%.

“Raising interest rates or tightening monetary policy now will add further downward pressure on an economy that is in the midst of recovering from the pain of the covid-19 pandemic,” Kuroda said, stroking the chance for a short-term rate hike.

He also said that the BOJ would not tolerate an increase in the 10-year interest rate above its implicit 0.25% limit, and had no plans to increase the upper limit despite pressure from rising global interest rates.

“There was speculation that the BOJ could adjust its policy to address currency movements, but the central bank’s answer was no,” said Shotaro Kugo, an economist at the Daiwa Institute of Research.

Kuroda’s remarks highlight the BOJ’s position as the world’s last major dove central bank, as its colleagues aggressively tighten monetary policy to curb rising inflation. read more

CATCHED IN A DILEMMA

Central banks across Europe raised interest rates on Thursday, some with amounts that shocked markets, in the wake of the US Federal Reserve’s 75 basis point rise. read more

The growing political divergence between Japan and the rest of the world has pushed the yen to its 24-year low against the US dollar, and threatens to cool consumption by increasing already rising import costs.

The government and the BOJ have stepped up their warnings against sharp yen falls, among other things by issuing a joint statement last week signaling readiness to enter the foreign exchange market if necessary. read more

“We need to pay close attention to the impact that financial and foreign exchange movements may have on Japan’s economy and prices,” the BOJ said Friday, including a reference to exchange rates in its policy statement for the first time in a decade.

However, such concerns about the weak yen have not deterred the BOJ from defending the limit of its 10-year yield target by increasing bond purchases.

The Yield ceiling has been attacked by investors who are betting that the central bank can adjust its policy as rising US interest rates push up long-term interest rates worldwide.

The 10-year Japanese government bond yield (JGB) reached a six-year high of 0.268% in early trading on Friday, before retreating to 0.22% following the central bank’s political decision.

Shortly after the announcement, BOJ made an additional offer to purchase unlimited quantities of 10-year JGB, including those with seven years left to mature.

BOJ is caught in a dilemma. With Japan’s inflation well below inflation in Western economies, the focus is on supporting the still weak economy with low interest rates. But pigeon policy has triggered a decline in the yen, damaging an economy that is heavily dependent on fuel and commodity imports.

As Kuroda has ruled out interest rate hikes, the government may be responsible for averting further yen dips, including by intervening in the market to support the currency.

However, analysts doubt that Tokyo can get the consent of Washington and other G7 members for a joint intervention, or that stepping in alone would work. read more

“There is a myth in the market and the public that currency intervention works. But the reality is that there is not much the government or the BOJ can do to stop the yen fall,” said Takeshi Minami, chief economist at the Norinchukin Research Institute.

“I think the BOJ will just sit tight and weather the storm.”

Reporting by Leika Kihara; Additional reporting by Tetsushi Kajimoto, Kantaro Komiya and Daniel Leussink; Edited by Jacqueline Wong, Richard Pullin and Kim Coghill

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