The Bank of Japan has chose to keep interest rates unchanged but opted for the radical step of targeting policy to hold the 10-year government bond yield at a current level of zero.
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Sept 21 (Reuters) – Gold rose on Wednesday reversing earlier losses, as the dollar pared gains ahead of the U.S. Federal Reserve’s policy outcome due later in the day, which is mostly expected to keep interest rates unchanged.
The central bank said it will continue to purchase assets like government bonds at a rate of about 80 trillion yen ($787 billion) a year.
Earlier this month BoJ governor Haruhiko Kuroda conceded ultra-low long-term interest rates were hurting the investment returns of insurance and pension companies and damaging business sentiment. Prospects for a shift further into negative territory for the BOJ’s key policy rate as a way to spur banks to lend more appeared uncertain. And its decision in January to introduce a negative interest rate – effectively charging banks to keep money with it – has sparked a backlash from the financial industry.
Bank stocks rallied in response to the BoJ’s announcement, with Tokyo’s Nikkei 225 index surging almost two percent by the close.
Investors bought the yen as an initial reaction to the BOJ statement earlier in the session, in which the central bank left its deposit rate unchanged at minus 0.1%, which pulled the dollar to as low as Y101.00, its lowest level since August 26.
In an official statement, Boj stated: “The Bank chose to introduce “Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control” by strengthening the two previous policy frameworks”. The yield curve control specifies that the BOJ will control both short-term and long-term interest rates.
Benchmark 10-year Treasury notes rose to 1.73 per cent compared to 1.69 per cent before the BOJ announcement, though investors were wary of driving them higher before a US Federal Reserve policy decision later in the global day.
By contrast, the economist still expects the bank to cut the policy rate further at the next meeting in November.
Volatility was especially acute in the currency markets with the Japanese yen weakening by as much as 1.2 per cent against the USA dollar in choppy trade. Ditching its emphasis on buying 7 to 12-year bonds could mean the BOJ spends more on shorter-dated paper, increasing the difference between shorter-and longer-dated yields. But it said that fostering the scale of “inflation expectations” that might encourage consumers and businesses to spend more was taking time.
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This was seen as move to more directly support the stock market and asset prices. Another is pumping cash into the economy to push inflation higher.
