July 31, 2018 / 4:47 AM / 3 months ago

BOJ takes measures to make policy flexible, promises to keep rates low

TOKYO (Reuters) - The Bank of Japan took measures to make its massive stimulus programme more flexible and pledged to keep interest rates low for the time being on Tuesday, reflecting its forecast that it would take time for inflation to hit its 2 percent target.

COMMENTS:

TAKEHIRO NOGUCHI, SENIOR ECONOMIST, MIZUHO RESEARCH INSTITUTE, TOKYO

“The BOJ did all it can do now. The BOJ has managed to create a foothold to make its yield curve control more flexible without lifting the yen.

“The BOJ said its ETF purchases will be flexible. I think that means it will reduce its purchases of ETFs as long as the stock market holds firm. It just couldn’t say so in its statement.

“The BOJ also said it will reduce the policy rate balance (banks’ deposits to which negative interest rates will be applied). Again if you reduce this amount to zero, that means the end of negative interest rates. So the BOJ took a first step towards that as well.

“The title of the BOJ’s policy statement talks about ‘strengthening of easing, so all the web-grabbing AI may see it as more easing.

“Of course economically speaking what they are doing could be seen as a step towards scaling back stimulus. But the BOJ gave forward guidance to keep rates low at least until October 2019. So you could say today’s steps would be an enhancement of easing to the view that the BOJ could move earlier.”

NOBUYASU ATAGO, CHIEF ECONOMIST, OKASAN SECURITIES, TOKYO

“Today’s decision was meant to enhance the sustainability of the BOJ’s massive easing as some part of its policy was nearing a limit.

“Reducing the amount of banks’ current account deposits to which negative interest rates are applied was a smart move.

“That should help Japan Post Bank and other financial institutions.

“One should not, however, take this as a retreat in the BOJ’s negative interest rates policy. The beauty of this is that the BOJ can still guide short-term interest rates at negative levels.”

IZURU KATO, CHIEF ECONOMIST, TOTAN RESEARCH

“There was no major policy scheme change but the main part of the policy announcement was the BOJ’s response to a decline in market function.

“We can say it is a step towards normalisation of monetary policy but it was a fine adjustment and the BOJ is expected to keep the existing policy framework.

“Given the statement mentioning the effects of the sales tax hike, the BOJ is unlikely to raise its minus interest rate in 2020, and it is seen keeping the wording of ‘around zero interest rate’ for the 10-year bond yield.”

NAOMI MUGURUMA, SENIOR MARKET ECONOMIST AT MITSUBISHI UFJ MORGAN STANLEY SECURITIES

“With forward guidance, the BOJ showed its commitment to a prolonged period of ultra-low rates.

“The central bank clearly differentiated the tweaks of this time from the indication of future tightening or rate hikes.

“The yen weakened, Japanese bond futures declined and stocks rose slightly due to unwinding of excess market expectations of higher interest rates. In that sense, the BOJ may yield initial success in sending market signals on its policy intentions.

“The BOJ remains in a bind, though, as it tries to control bond yields while allowing them to move more flexibly. This means that the BOJ’s financial market bureau shoulders a lot of homework.”

RODRIGO CATRIL, SENIOR FX STRATEGIST, NATIONAL AUSTRALIA BANK, SYDNEY

“The Bank of Japan has not changed its policy officially and there is a commitment to keep its easy policy for longer.

“The big question of the moment however is what does its intention of flexibility around the 10-year target of zero mean. At this point, it’s very unclear what they mean by allowing long-term rates to go up and down. That is as vague as it can be. The proof will be in how they react in the open market operations. It will be interesting to see how they allow 10-year JGB rates to increase. That will set a tone for the market.

“Then the big question would be to what extent will the BOJ buy JGBs. Their guidance of 80 trillion, as we know, has been just a guidance since the yield curve control was introduced. They have been buying at a much slower pace. So from an easing perspective they have essentially been tapering. If there’s more tapering from this new policy then the question will be how the market reacts to that. But that remains to be seen.

“We now have to see what Kuroda says. That will give us some clarity in terms of what the flexibility means. The market is definitely cautious at this point. Hopefully we’ll get some more clarity when Kuroda speaks later today.”

NICK TWIDALE, ANALYST, RAKUTEN SECURITIES AUSTRALIA, SYDNEY

“The market is a little bit disappointed. I think there is some propensity for USD/JPY to move higher in the short-term back up to 112.50 and then look to challenge 113 levels. What we were looking for was a bit of clarification certainly on the YCC control, moving forward. It’s what the market hinted we get and we’ve got half of what was expected. Because we’ve had such a good move in USD/JPY down from 113 to 111 level I think there is the propensity for it to retrace some of that.

“We got the news to the market and it came a week ago, we had the reaction to that. Now they’ve come through and give a bit more clarity. I think it’s been a fairly smooth operation, they’ve done a good job in that respect.

“Some of the people are referring to stealth tapering and I think that is an important factor. That could see yen appreciation over a more medium-term.”

HIROAKI MUTOU, CHIEF ECONOMIST, TOKAI TOKYO RESEARCH INSTITUTE

“It is a very mild policy change by the BOJ but its policy vector is heading towards tightening. The BOJ’s message was to let long-term yields go higher.

“I think the BOJ was successful in tweaking its policy scheme which did not greatly impact markets but introduced a tool, forward guidance for policy rates, for future tightening.

“The BOJ will be able to send a subtle message to the markets by tweaking its words in forward guidance for policy rates in the future.”

Reporting by Kaori Kaneko, Hideyuki Sano, Tetsushi Kajimoto in Tokyo and Swati Pandey in Sydney; Editing by Chris Gallagher

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