The Bank of Japan expanded its 10-year Japanese government bond yield target band on Tuesday, surprising market participants, pushing the yen sharply higher, and led to a fall in government bonds.
At the policy meeting of the BoJ, board members unanimously decided to maintain a negative interest rate of -0.1 percent on current accounts that financial institutions maintain at the central bank.
The bank will also continue to purchase a necessary amount of JGBs without setting an upper limit so that 10-year JGB yields will remain at around zero percent.
However, they decided to expand the range of 10-year JGB yield fluctuations to around plus and minus 0.5 percentage points from around plus and minus 0.25 percentage points.
The BoJ has been buying sizeable amount of bonds this year to defend its yield cap. As a result, bond holdings of the BoJ have hit a new record recently.
The Japanese central bank said it is willing to take additional easing measures, if needed. The bank also expects short and long-term policy interest rates to remain at their current or lower levels.
The latest move is likely to pave the way for fine-tuning the current ultra loose monetary policy under the leadership of new governor after the incumbent Haruhiko Kuroda’s term ends next April.
There was nothing in the policy statement that would suggest that the decision heralds a wholesale tightening of monetary policy, Marcel Thieliant at Capital Economics said. The economist expects the short-term policy rate to remain at -0.1 percent for the foreseeable future.
The BoJ said the decision to modify the conduct of yield curve control will help to improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions.
Japan’s economy is expected to recover, with the impact of the pandemic and supply-side constraints waning. However, the BoJ cautioned that there remain extremely high uncertainties.
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