BOJ Keeps Ultra-Low Rates, Decides To Conduct Policy Review

(Reuters) – The Bank of Japan (BOJ) kept interest rates extremely low on Friday but announced a sweeping review of its monetary policy, setting the stage for new President Kazuo Ueda to gradually unwind his predecessor’s massive stimulus program. As widely expected, the BOJ did not change its yield curve (YCC) policy, which sets the short-term interest rate at -0.1% and the 10-year bond yield near zero. But the central bank revised its guidance for future policy, removing a pledge to keep interest rates at “current levels or lower”. The yen fell to a seven-week low of $135.85 per dollar as Japanese government bonds rose more than 1.3%. Japan’s Nikkei stock average rose 1.4% to an eight-month high, while bank shares fell as the central bank kept its monetary policy stance on hold. Here are some analysts on the decision: JIM LEAVISS, CIO, PUBLIC INTEREST REVENUE, MandG, TOKYO “The Fed and the US economy are saving them from doing anything now and buying them time. That doesn’t mean we won’t change YCCs in the next 1-1/2 years. “I’m surprised they haven’t done anything, especially since the Japanese government is downgrading the status of COVID-19 from something that facilitates politics to the same status as winter flu. “I think the trade I’d like to make is not to have very many JGBs in our portfolio yet.” SIMON HARVEY, CURRENCY ANALYSIS SYSTEM, MONEX EUROPE, LONDON “The bottom line is still that the BoJ needs to start normalizing policy, probably in the second quarter. “There’s still a big consensus that shorting the dollar to buy the yen is the big move of the year, but we’re looking for a catalyst.” CHARU CHANANA, MARKETING STRATEGIST, SAXO MARKET, SINGAPORE “The anticipation of the announcement created quite a bit of volatility in the yen, and expectations grew that we would get a correction. But in the end, even their (BOJ) policy review announcement took 1-1/2. years … a period longer than the market expected (corrections for July), although inflation forecasts were generally raised. The Japanese yen appears to be returning to the Treasury yield story at the moment. CHRISTOPHER WONG, CURRENCY STRATEGIST, OCBC, SINGAPORE “The policy rating is in line with our expectations for the policy rating. We still expect the removal of the YCC system, a rate hike at some point this year due to rising inflationary pressures (Tokyo CPI hit another record high) and upward pressure. Wages are rising in Japan.” SHOTARO KUGO, Economist, TOKYO DAIWA RESEARCH INSTITUTE “It is not a big surprise the further instructions and ‘assessment’ were announced in advance. Interestingly, Ueda seems to have relied on media reports before the political meeting, as we have seen relatively more announcements this time. Perhaps this is his way of communicating to avoid surprises and gradually introduce policy changes.” MOH SIONG SIM, CURRENCY STRATEGIST, BANK OF SINGAPORE, SINGAPORE “It seems a bit crazy that the market did not expect any change, but perhaps held out hope that policy, especially the YCC, might change. “The BOJ has raised inflation forecasts, but at the same time I think the review, which is expected to last 1-1/2 years, has somewhat dampened hopes for policy change…. This may have dampened hopes for immediate political change.” JOSEPH CAPURSO, HEAD OF INTERNATIONAL AND SUSTAINABLE ECONOMICS, COMMONWEALTH BANK OF AUSTRALIA, SYDNEY “The reactions of the JGB and the yen suggest that some people expected the BOJ to tighten policy at this meeting. “There was a major change in the policy statement today and they dropped the previous guidance on interest rates … I think this is a step towards them (Dumping) YCC … in the coming months.” NAOMI MUGURUMA, ADVANCED MARKET ECONOMICS, MITSUBISHI UFJ MORGAN STANLEY SECURITIES “The BOJ sounded dovish on the price outlook, suggesting that it is unlikely to meet its 2 percent inflation target over the forecast periods of the outlook report. “Overall, the BOJ has decided to continue to ease monetary policy for the foreseeable future. The fact that the BOJ leaves a reference to further easing, if necessary, strengthened its position to continue to ease monetary policy. “Overall, the BOJ sounded cautious and signaled no drastic changes in its monetary policy outlook. It mentioned a review of monetary policy, but it wasn’t clear to me what effects and spillovers it wanted to look at.” SHANE OLIVER, CHIEF ECONOMY, AMP (OTC:AMLTF), SYDNEY “Anyway, the key for me was that they removed the reference to the COVID-19 pandemic and the expectation that interest rates will stay at current levels or lower. There’s a clear dovish bias since October 2019. So that’s a pretty significant change. That’s why I’m balanced. I think it’s funny, it’s just moving slower than some money markets expected. “Valuation is a long process. I don’t know that the market will give them that long. Financial markets are starting to anticipate the change. As inflation numbers rise in Japan, I suspect the market will become more focused in anticipation of any tightening. SEAN CALLOW, SENIOR CURRENCY STRATEGIST, WESTPAC, SYDNEY On the “Dovish side”, they announced an extended “Broad Perspective Review” deadline of 1-1/2 years, changing expectations that the BoJ would want to leave its accommodation. But that doesn’t necessarily rule out adaptations; In his next press conference, Ueda may make it clear that the BoJ will not tie its hands until 2024, and will change its policy if necessary. USD/JPY moved higher again as a result of the BoJ and there could be some fall as attention turns to next week’s FOMC meeting. Today’s decision should cement the yen as the financial currency of choice – for now

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