At its latest meeting the central bank announced plans to place “yield curve control” at the core of its monetary policy framework.
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The Governor justified the decision to move the policy focus on targeting longer-term interest rates by explaining that a steeper yield curve should help sentiment, unlike the current flattening yield curve which is seen as being damaging to the financial sector.
The move had an immediate impact with Japanese 10-year bonds rising above zero for the first time in six months, while major Japanese banks’ shares surged with Mitsubishi and Sumitomo Mitsui up around 6 per cent.
The yen strengthened on Wednesday (Sep 21) despite the Bank of Japan’s effort to hammer it down with new long bond yield targets. The BOJ believes that its monetary policy and the government’s fiscal policy as well as initiatives for strengthening Japan’s growth potential will produce synergy effects, and thereby will navigate Japan’s economy toward overcoming deflation and achieving sustainable growth, it said. Mr Kuroda recently acknowledged that negative rates had cut into financial institutions’ profits, while pointing out the policy had driven borrowing costs lower. The Hang Seng of Hong Kong gained 0.6 percent to 23,669.90 and the Shanghai Composite index added 0.1 percent to 3,025.87.
It said it will continue its programme of buying long-term Japanese government bonds so the balance of its holdings will increase by JPY 80 trn annually.
CURRENCIES: The dollar jumped initially following the Bank of Japan’s policy announcement, but later fell back to 101.43 yen, below the previous day’s 101.62 yen level.
USA stocks rallied and the dollar index eased further on Wednesday after the Federal Reserve left US interest rates unchanged, keeping its low-rate environment intact for now.
The central bank raised interest rates for the first time in almost a decade last December but weak economic data and global uncertainty have prevented it from raising the rates further. But it abandoned its base money target and instead 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.
“The next several days will become a test of BoJ’s new policy and if it fails to reach its mark, the dollar-yen rate could drift towards 100.00 as disappointment creeps in”. “If it takes additional easing in the future, it will probably deepen the negative rate”. The central bank’s decision to cut rates to minus 0.1 percent in January set off a rout in banking stocks and a flight to the safety of the yen. So far, unlike with the Fed, there is no talk of ending its asset purchases or increasing interest rates on short-term investments and lending.
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The dollar fell 0.2 percent to 100.15 yen JPY= and touched a low of 100.12 yen at one point, its lowest level since August 26. The bank shares were poised for their best day in more than two months.
