BOJ Keeps Rates Ultra-Low, Warns It’s Watching Yen Movements Closely

  • BOJ keeps interest rate targets unchanged, as expected
  • BOJ says monitoring impact of currency movements on economy
  • No change to dovish policy guidelines
  • BOJ Gov Kuroda will brief the media at 06:30 GMT

TOKYO, June 17 (Reuters) – The Bank of Japan kept interest rates ultra-low on Friday and its forecast to keep borrowing costs at “current or lower” levels, signaling its determination to focus on support of the timid recovery of the economy after COVID-19. 19 pandemic.

However, in a nod to the hit the yen’s recent sharp declines could have on the economy, the central bank said it needed to “closely monitor” the impact exchange rate moves could have. on the economy.

At the two-day policy meeting that ended on Friday, the BOJ stuck to its target of -0.1% for short-term rates and its promise to guide the 10-year yield around 0% with a vote. 8 to 1.

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The decision was widely expected, but leaves the BOJ’s position even further at odds with other major central banks, which are aggressively tightening policy to curb soaring inflation. Read more

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

“The BOJ has sent a message that while regular currency movements are important to achieve its price target, it will not guide policy by emphasizing movements in the yen.”

The bank also left unchanged its guidance that short-term and long-term rates should remain at “current or low levels.”

The yen fell 1.7% and the yield on benchmark 10-year Japanese government bonds (JGBs) fell after the BOJ’s policy decision to remain a dovish outlier.

Caught in the dilemma

Central banks across Europe raised interest rates on Thursday, some by an amount that shocked markets, following the U.S. Federal Reserve’s 75 basis point hike. A surprise move by the Swiss National Bank has made the BOJ the last major dovish central bank in the world. Read more

The growing divergence in monetary policies between Japan and the rest of the world has pushed the yen to its lowest level in 24 years, threatening to chill consumption by raising already rising import costs.

The government and the BOJ have stepped up their warnings against sharp falls in the yen, including issuing a joint statement last week that they were ready to enter the forex market if needed. Read more

“We need to carefully monitor the impact that movements in financial and currency markets could have on Japan’s economy and prices,” the BOJ said in a statement announcing Friday’s policy decision.

These worries about yen weakness, however, did not deter the BOJ from defending an implied cap of 0.25% for its 10-year bond yield target through accelerated bond purchases.

The BOJ’s yield cap has come under attack from investors betting the central bank could cave to global market forces, as rising US yields drive long-term rates higher around the world.

The 10-year Japanese government bond (JGB) yield hit a six-year high of 0.268% in early trading on Friday, topping the BOJ’s 0.25% ceiling, before falling to 0.22% after the policy decision of the central bank.

Shortly after the policy was announced, the BOJ made an additional bid to buy unlimited amounts of 10-year JGBs, including those with seven years left to maturity.

The BOJ is caught in a dilemma. With Japanese inflation being much lower than that of Western economies, its objective is to support the still weak economy with low rates. But the accommodative policy triggered sharp falls in the yen, hurting an economy heavily dependent on imports of fuel and raw materials.

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

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