(Bloomberg) -- The Bank of Japan clarified the size of its movement range for bond yields and scrapped a buying target for stock funds at the end of a policy review meant to give it more flexibility as its fight to stoke inflation extends further into the future.
While leaving its main policy rates unchanged, the bank said the band around its 10-year bond yield target was around 0.25% either side of zero, according to a statement Friday. Until now the range had been assumed to be around 0.2% based on comments from Governor Haruhiko Kuroda.
The move is likely aimed at generating more movement in Japan’s low volatility bond market as the BOJ tries to address some of the adverse effects of its stimulus and stem criticism of its policies.
The BOJ also ditched its 6 trillion yen ($55 billion) guide for annual purchases of exchange-traded funds, while sticking with an upper limit of 12 trillion yen so it can still step into the market if sentiment takes a turn for the worse. The bank also said it would focus on buying ETFs from the TOPIX rather than the Nikkei 225.
Declines in the Nikkei accelerated after the decision, while the yen briefly weakened, before strengthening a tad. The latest 10-year bond yield was unchanged.
The bank also said it would offer lending incentives if it lowered its target rates. The move is likely aimed at changing the perception it cannot lower its negative rate due to the impact it would have on struggling regional banks.
With Friday’s policy tweaks, Kuroda is walking a fine tightrope between shoring up support for his stimulus over the longer term and leaving the impression that he’s backpedaling on his easing measures.
His job hasn’t been made any easier by global peers that have kept the pedal on stimulus. The European Central Bank last week made clear it plans to buy more bonds and the Federal Reserve on Wednesday projected near-zero rates at least through 2023, despite improved forecasts for inflation, employment and growth.
The BOJ’s scope for ultimately ekeing out Friday’s changes owes much to a recent weakening of the yen, as recent jumps in U.S. Treasury yields far outran those in Japan, where they are held down by the central bank. The wider difference in rates contributed to the yen reaching the 109 mark against the dollar compared with a much stronger 102.7 at the start of the year.
A weaker yen helps boost the profits of Japan’s exporters while generating some upward pressure on prices via more expensive imports. The growing rate difference also supports Kuroda’s claim that the BOJ’s yield curve control approach can still provide powerful stimulus and only needs a touch more flexibility rather than an overhaul.
“The BOJ couldn’t really hope for much better timing,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute ahead of Friday’s decision. “The yen isn’t gonna break through the symbolic 100 mark against the dollar, even if the result of the review is seen as backtracking from stimulus.”
(Adds market reaction, more details from release)
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