The Bank of Japan kept monetary policy steady on Tuesday and held off on taking fresh steps to calm bond market volatility, possibly judging that recent market turbulence has yet to pose a significant risk to the economy’s recovery prospects.
The yen edged higher against the dollar, Japanese equities futures slipped further and 10-year government bond futures extended losses, reflecting disappointment that the central bank had not taken the additional steps.
Rising bond market yields have already pushed up some mortgage rates, raising concerns that a further rise in yields could increase other borrowing costs and so dent the economy’s new found momentum under Prime Minister Shinzo Abe.
Some central bankers had been considering the idea of extending the maximum duration of cheap, fixed-rate funds it offers via market operations to two years from the current one year.
Such a move would have made it easier for banks that were caught wrong-footed by last month’s spike in yields to hedge their portfolios by reducing the need to sell bonds to balance their books, thus potentially dampening market swings.
The BOJ’s nine-member board likely decided to skip fresh market measures as bond markets have restored some calm and the economy is showing increasing signs of improvement.
Data on Monday showed economic growth was faster than previously thought, the current account surplus was growing rapidly and lending was on the up.
“Japan’s economy is picking up,” the central bank said in a statement announcing the policy decision, a more upbeat view than last month when it had said growth was starting to pick up.
It also revised up its assessment on exports and output to say they were picking up amid a gradual recovery in global growth.
Under new Governor Haruhiko Kuroda, the BOJ stunned financial markets on April 4 by setting in motion an intense burst of monetary stimulus. It kept its policy settings unchanged at the two-day rate review that ended on Tuesday.
“Today’s decision may reflect Kuroda’s stance of not taking incremental action in response to day-to-day market moves,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo.
“He may also have thought there’s no need to be too nervous about the market volatility, hoping to determine more the effect of the BOJ’s bond-buying programme for the time being.”
Japanese government bond prices extended losses after the BOJ statement. September 10-year Japanese government bond (JGB) futures fell more than a half point to as low as 142.44, while the yield on 10-year cash JGBs rose 4.5 basis points to 0.880 per cent.
The dollar fell as low as 97.78 yen, having stood at around 98.65 yen or so just before the BOJ’s decision.
Nikkei index stock futures extended losses and were down 2.6 per cent at 13,250 by 0300 GMT. The cash market was closed for a lunch break when the statement was released.
The rise in bond yields in late May, slowing growth in China and uncertainty over when the US Federal Reserve would roll back its stimulus have hurt global stocks, including Japanese equities.
The yen also surged to a two-month high against the dollar last week, weighing on the export-reliant economy and taking back a chunk of the feel-good effect of “Abenomics,” a policy prescription of sweeping fiscal and monetary expansion aimed at jolting the world’s third-biggest economy out of a two-decade long slump.
Before the setback, market euphoria over the government’s campaign to reflate the economy had driven Japanese equities up over 70 per cent since mid-November and had sent the yen tumbling to a 4-1/2-year low against the dollar of 103.74 yen.
A loss of market confidence would be a big blow to Abenomics, which relies on sentiment to spur a virtuous circle of consumption, investment, higher wages and lending to revitalize the economy.
Markets are focusing on what Kuroda has to say in his post-meeting news conference on the market turbulence, which has cast doubt on his argument that the April action would help push down yields across the curve.
“As long as yields move in line with economic developments, this is not a problem. If yields start to deviate from the underlying economy, the BOJ could make some minor adjustments in the future,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
The BOJ promised in April to double its bond holdings in two years to expand the supply of money at an annual pace of 60 trillion (HK$4.7 trillion) to 70 trillion yen to meet its pledge of achieving a 2 inflation target.