The Bank of Japan on Wednesday chose to adopt a target for long-term interest rates in an overhaul of its massive stimulus programme. The fact that the BOJ is trying to overshoot an inflation target it has struggled to hit has raised eyebrows, Athey said.
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Instead, it set a “yield curve control” under which it will buy long-term government bonds to keep 10-year bond yields around their current zero percent [nT9N1B603C].
The central bank said it would lift controls on maturities of the bonds it buys under the huge asset-purchase plan – there are concerns that the bank is running out of government bonds that it can buy.
Traders across the world eagerly await the outcome of the policy meeting from the US Federal Reserve and the Bank of Japan.
The Reserve Bank of New Zealand (RBNZ) holds a policy meeting on Thursday and economists expect rates to remain at a record low of 2 per cent, with a bias to ease further.
But it said it was to tweak its asset purchases to push yields on long-term government bonds higher – helping banks and other institutional investors grow returns in the negative interest rate environment.
Both hawkish and dovish comments from Fed officials recently have stoked volatility in financial markets, although consensus is now centred on a U.S. rate hike by year-end, instead of sometime in September.
Bank stocks rallied in response to the BoJ’s announcement, with Tokyo’s Nikkei 225 index surging almost two percent by the close.
The euro surged 0.7 percent to 114.25 yen after earlier dropping as low as 112.50, its lowest since August 16.
Investors then turned to sell the yen as details from the BOJ’s latest statement emerged, revealing that the central bank had also launched a target on 10-year bond yields. Despite the excess cash created by the BOJ’s bond-buying program, there has been little demand for new lending and profits at commercial banks have suffered.
“It’d better be a very “comprehensive” assessment from the BOJ”, said Sameer Goel, who leads the Asia Macro Strategy team at Deutsche Bank, in a note.
Left interest rates at their current record low of minus 0.1%.
Fed Chair Janet Yellen is scheduled to conclude the USA central bank’s meeting with a press conference at 2:00 p.m. ET (1800 GMT) on Wednesday.
So the decision NOT to lower rates further has in itself been seen as a short term boost for markets and the yen – which is now trading lower against the United States dollar. Its announcements in March this year approached those heights, too, as did the Bank of Japan’s plunge into negative rates. But the new framework made “investors feel how the BOJ is much more serious than before” in tackling slow growth and deflation, forcing some investors to unwinding their long yen positions, said Ishizuki.
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The U.S. dollar rose as high as 102.78 yen, but in early European trading had slipped back to 101.79 yen.
