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Bank of Japan to trim bond buying, keeps rates steady

Published 06/13/2024, 05:04 PM
Updated 06/14/2024, 05:25 AM
© Reuters. FILE PHOTO: A man walks past the Bank of Japan building in Tokyo, Japan March 18, 2024. REUTERS/Kim Kyung-Hoon/File Photo
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By Leika Kihara

TOKYO (Reuters) -The Bank of Japan said on Friday it would start trimming its huge bond purchases and announce a detailed plan next month on reducing its nearly $5 trillion balance sheet, taking another step toward unwinding its massive monetary stimulus.

Governor Kazuo Ueda also said he would not rule out raising interest rates in July as weakness in the yen pushes up import costs, suggesting the BOJ was retaining a hawkish stance despite recent signs of weakness in consumption and the broader economy.

"Depending on economic and price data that become available at the time, of course there is a possibility we could decide to raise interest rates and adjust the degree of monetary support in July," Ueda told a news conference.

As widely expected, the BOJ kept its short-term policy rate target in a range of 0-0.1% by a unanimous vote. It also left unchanged the pace of monthly bond buying at roughly 6 trillion yen ($38 billion).

But the bank decided to lay out details of its bond tapering plan for the coming one to two years at its next meeting on July 30-31, after collecting views from market participants. Some market watchers had expected it to drop more definitive clues on Friday.

"In trimming bond buying, it's important to leave flexibility to ensure market stability, while doing so in a predictable form," Ueda said.

He said the size of the reduction would likely be "significant," but offered few clues on the pace and degree of the buying cutbacks.

"The BOJ probably wanted to lay the groundwork so that the tapering doesn't turn into a surprise," said Katsuhiro Oshima, chief economist at Mitsubishi UFJ (NYSE:MUFG) Morgan Stanley Securities.

"It's similar to how the U.S. Federal Reserve disclosed a medium- to long-term guidance on tapering beforehand, to avoid heightening uncertainty at each policy meeting," he said.

Some market players, however, took the decision to wait until July as an indication the central bank will be cautious in adjusting monetary policy going forward.

Such dovish market interpretation sent the yen to a more than one-month low of 158.255 to the dollar, and pushed down the yield on the benchmark 10-year Japanese government bond (JGB) to 0.92%.

"Today's decision suggests that the BOJ is very careful about reducing the bond buying amounts, which means the central bank is also cautious about raising rates," said Takayuki Miyajima, senior economist at Sony (NYSE:SONY) Financial Group.

WEAK YEN A CONCERN

The BOJ exited negative rates and bond yield control in March in a landmark shift away from a decade-long, radical stimulus programme.

With inflation exceeding its 2% target for two years, it has also dropped signs that it will keep raising short-term rates to levels that neither cool nor overheat the economy - seen by analysts as being somewhere between 1-2%.

Many market participants expect the BOJ to raise rates again some time this year. In a poll taken by Reuters on June 3-7, nearly half of economists projected a hike in the July-September period, while another 43% saw it happening in October-December.

The central bank has also been under pressure to embark on quantitative tightening (QT) and scale back its huge balance sheet to ensure the effects of future rate hikes smoothly feed into the economy.

The BOJ's efforts to normalise monetary policy come as other major central banks, having already tightened monetary policy aggressively to combat soaring inflation, look to cut rates.

The Fed held rates steady on Wednesday and signalled the chance of a single cut this year. The European Central Bank cut interest rates last week for the first time since 2019.

But the normalisation of Japan's still-loose monetary policy is clouded by weak consumption, which has cast doubt over the BOJ's view that robust domestic demand will keep inflation on track to durably hit its 2% target.

Ueda acknowledged recent weak signs in consumption, but said spending was likely to increase as scheduled tax breaks, summer bonus payments and rising wages boost household income.

He also warned that recent yen falls could have a bigger inflationary effect through higher import costs, as they come at a time when companies were already steadily hiking prices for goods and services.

"Exchange rate moves would have a big impact on the economy and prices," Ueda said. "Recent yen falls have an effect of pushing up prices, so we are closely watching the moves in guiding policy."

© Reuters. FILE PHOTO: A man walks past the Bank of Japan building in Tokyo, Japan March 18, 2024. REUTERS/Kim Kyung-Hoon/File Photo

Japan's battered currency, down roughly 10% on the dollar so far this year, has become a headache for policymakers by inflating import prices, which in turn boosts living costs and hurts consumption.

($1 = 157.9400 yen)

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