The Bank of Japan maintained its easing stance, buffeting the yen and sending bond yields lower, as Governor Haruhiko Kuroda held his final meeting after a decade of massive stimulus.
(Bloomberg) — The Bank of Japan maintained its easing stance, buffeting the yen and sending bond yields lower, as Governor Haruhiko Kuroda held his final meeting after a decade of massive stimulus.
The decision came shortly after parliament formally approved Kazuo Ueda to succeed Kuroda in April. Leading up to the meeting, multiple BOJ watchers had warned of the risk that Kuroda might adjust or scrap the central bank’s easing program to pave the way for a fresh start for Ueda, expectations that were dashed by the stand-pat decision.
Ueda will face the challenge of how to manage a stimulus program showing signs of strain and how to pare it back without jolting markets should the central bank under his leadership judge that its inflation target has finally been achieved.
“All in all, the BOJ under Ueda will keep up monetary easing while paying attention to market functionality and they won’t go for a major change immediately,” said Nobuyasu Atago, chief economist at Ichiyoshi Securities and a former BOJ official.
At Friday’s meeting, the BOJ kept its policy settings for its negative interest rate and yield curve control program unchanged. The decision was in line with the view of almost all 49 economists surveyed by Bloomberg.
Kuroda’s dovish stance at the end of his record-breaking run at the helm, remained in sharp contrast with the Federal Reserve, as it considers a possible re-acceleration the pace of US rate hikes this month. The BOJ decision may also temper the market view that side effects from yield curve control need to be addressed soon.
The currency weakened as much as 0.6% before paring the drop to trade around 136.30 per dollar. The yield on 10-year government debt fell more than 11 basis points to as low as 0.385%, compared with the BOJ’s yield cap of 0.50%.
The yield on one of the notes in the 10-year sector even slipped below zero, as traders pulled back from bets on a bond selloff in an ever more illiquid debt market.
Negative Yields Are Back in Japan as BOJ Squeezes Broken Market
Speaking later in the day, Kuroda said Ueda was an appropriate choice for governor who would make choices based on the actual state of the economy, financial markets and prices.
“I’ve known Prof. Ueda for a very long time. In the mid 1980s he was at the finance ministry’s research institute, and since then I’ve attended all kinds of conferences with him,” Kuroda said. “He’s a great economist, and at the same time I trust his deep knowledge of monetary policy.”
Kuroda again pushed back against talk of the central bank exiting from its current easing policy saying it would be inappropriate to discuss taking steps in that direction now.
The central bank signaled its continued concern over the economy by downgrading its view on exports and production, though it left its overall economic assessment unchanged. Revised data on Thursday showed the economy only just missed falling into recession by a whisker at the end of last year, a result that showed more weakness than initially thought.
“It was difficult to imagine the BOJ making any major change at Kuroda’s very last meeting,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. “If you look at the economy, gross domestic product is still trending weak — in that state, it seems the BOJ has decided that it’s appropriate to maintain policy.”
The decision will leave the US bond market and global risk sentiment the key drivers of the yen in the short-term, according to strategists. Global bonds rallied Friday, supporting the move in the Japanese market, as investors mulled pockets of trouble in the US banking sector.
Yen’s Fate in the Hands of US Market After Kuroda Stands Pat
Despite lingering speculation that the BOJ will have to tweak the yield curve-control framework at some point, this time the bank didn’t face the kind of intense market attack it saw in the run-up to the January meeting. The BOJ bought a record amount of government bonds that month to defend its 10-year yield cap, after the BOJ unexpectedly widened it in December.
While BOJ officials continue to see distortion in the shape of Japan’s yield curve, the central bank still needs time to look at the impact of various measures taken since December, people familiar with the matter told Bloomberg earlier.
Almost two-thirds of BOJ watchers expect a monetary policy change by the middle of this year with June being the most popular timing, according to a Bloomberg poll that followed Ueda’s first parliamentary confirmation hearings.
In the period through to the April 27-28 gathering, the BOJ will go through major leadership change. Two deputy governors will step down on March 19, replaced by one of Kuroda’s key policy architects Shinichi Uchida, and former Financial Services Agency chief Ryozo Himino.
Kuroda will conclude the longest governorship in the BOJ’s 140-year history on April 8. The governor said the benefits of his stimulus program had far outweighed any side effects and had brought the economy out of a deflationary state, ended an “ice age” in the labor market while creating millions of jobs.
Still, not achieving the bank’s stable 2% inflation target was regrettable, he said.
Economists are split on the success of his 10-years at the helm. While some point to the beneficial effects of weakening the currency, others refer to the high cost of achieving meager gains.
“Striking a balance between reducing the side effects of the current easing framework and aiming for underlying inflation is the biggest challenge,” said Jin Kenzaki, head of research for Japan and chief Japan economist at Societe Generale SA. “Kuroda himself has struggled with this balance in the latter half of his stint.”
Asked about the massive accumulation of bond and stock fund holdings during his term, Kuroda said he had no misgivings.
“I have absolutely no regrets there, and I don’t think I’m leaving behind a negative legacy,” he said.
–With assistance from Erica Yokoyama and Yoshiaki Nohara.
(Adds comments from Kuroda’s final post-decision press briefing)
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