TOKYO
\nThe Bank of Japan made its yield curve control policy more flexible and loosened its defence of a long-term interest rate cap on Friday, in moves seen by investors as a prelude to an eventual shift away from massive monetary stimulus.
\nWhile the central bank kept ultra-low interest rates and stressed the need to maintain monetary support, it said the tweak to yield curve control would allow it to respond \u201cnimbly\u201d to risks including rising inflation.
\nThe announcement shook markets, with the yen and yields surging and stocks tumbling in volatile trade as some investors saw the BOJ\u2019s decision as an effective removal of the 0.5% yield cap and preparation for an exit from ultra-loose monetary policy.
\n\u201cAlthough the BOJ left the cap unchanged at \u2018around 0.50%\u2019, the subtle changes in language suggest that they are gearing up, or at least open to, tweaking the YCC target at a future date, provided that conditions are supportive,\u201d said Carlos Casanova, senior Asia economist at UBP in Hong Kong.
\nAt the two-day policy meeting that ended on Friday, the BOJ kept unchanged its short-term interest rate target at -0.1% and that for the 10-year government bond yield around 0%.
\nIt also maintained guidance allowing the 10-year yield to move 0.5% around the 0% target, but said those would now be \u201creferences\u201d rather than \u201crigid limits\u201d.
\nThe BOJ said it would offer to buy 10-year Japanese government bonds (JGB) at 1.0% in fixed-rate operations, instead of the previous rate of 0.5%, signalling that it would now tolerate a rise in the 10-year yield to as much as 1.0%.
\n\u201cBy raising the upper limit for the fixed rate operations to 1%, the BOJ effectively widened the 10-year target band, making it easier for the central bank to flexibly guide the yield target,\u201d said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.
\n\u201cIt made a stealth move in that sense.\u201d Board member Toyoaki Nakamura dissented to the BOJ\u2019s decision on the view that while the decision to make YCC more flexible was desirable, the timing was premature.
\nThe dollar surged against the yen and the 10-year JGB yield rose to 0.550% after the announcement, the highest since September 2014 while the Nikkei stock average plunged.
\nThe BOJ\u2019s meeting comes after the Federal Reserve\u2019s decision on Wednesday to raise interest rates, a move that further widens the interest rate gap between the United States and Japan.<\/p>\n
Inflation expectations heightening
\nIn a quarterly outlook report, the BOJ revised up this year\u2019s core consumer inflation forecast to 2.5% from 1.8% projected in April.
\nBut it cut its fiscal 2024 forecast to 1.9% from 2.0% in April and maintained its 1.6% estimate for 2025.
\nInflation has exceeded the BOJ\u2019s projections made in April and wage growth has accelerated, the central bank said, adding that there were changes in corporate wage- and price-setting behaviour.
\nPrice expectations were also showing signs of heightening again, it said.
\n\u201cTaking into account extremely high uncertainty on the economic and price outlook, it is appropriate to enhance the sustainability of monetary easing under the current framework by conducting yield curve control with greater flexibility and nimbly responding to upside and downside risks,\u201d it said.
\nSince introducing YCC in 2016, the BOJ had little trouble controlling bond yields when inflation remained well below its target.
\nThat changed last year, when soaring commodity prices pushed inflation above the 2% target and gave investors reason to attack the yield cap. After buying huge amounts of bonds to defend the then 0.25% ceiling, the BOJ last December widened the yield band and now allows the 10-year yield to rise by up to 0.5%.
\nWith wages and inflation rising, markets have been simmering with speculation of an early tweak to YCC.
\nData released on Friday showed core consumer inflation in Japan\u2019s capital slowed in July but remained well above the central bank\u2019s 2% target, underscoring rising price pressure.<\/p>\n","protected":false},"excerpt":{"rendered":"
TOKYO The Bank of Japan made its yield curve control policy more flexible and loosened its defence of a long-term interest rate cap on Friday, in moves seen by investors as a prelude to an eventual shift away from massive monetary stimulus. While the central bank kept ultra-low interest rates and stressed the need to […]<\/p>\n","protected":false},"author":2,"featured_media":346200,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"class_list":{"0":"post-346183","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business"},"yoast_head":"\n