Kuroda Deepens BOJ's Outlier Status, Keeping Pressure on Yen




  • In Business
  • 2022-06-17 04:32:54Z
  • By Bloomberg

(Bloomberg) -- Bank of Japan Governor Haruhiko Kuroda held firm with rock-bottom interest rates, defying an intensifying global wave of central bank tightening and concentrated market pressure on the yen and government bonds.

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The central bank kept its policy settings for yield curve control and asset purchases, according to a statement Friday, in line with the forecasts of almost all surveyed economists.

In a rare move, the bank added a reference to foreign exchange rates to its list of risks, following the yen's rapid weakening to a 24-year low earlier this week.

The currency whiplashed against the dollar after the decision before retreating, but didn't succumb to a vertiginous slide that would have been cheered on by yen bears. The yield on 10-year government debt slipped back below its 0.25% ceiling, having earlier reached its highest since the BOJ started targeting it.

Both outcomes suggest a relatively successful result for the BOJ at the end of a week when all manner of possibilities seemed to be on the table for potential policy tweaks or market meltdown.

"Kuroda is firmly and clearly saying that he won't cave in to the intensified market pressure," said Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research & Consulting. "By just sticking to his goal of stable inflation, Kuroda is demonstrating a rock solid determination to continue easing."

In his last year as the country's top central banker, Kuroda is pushing back against mounting pressure to normalize policy as central banks race to raise interest rates and market bets mount against the BOJ's ceiling on yields. Kuroda is insisting that the economy still needs support to recover from the pandemic and that inflation in Japan needs firmer wage growth to become stable and enable a normalization of policy.

With the divergence with the Federal Reserve widening, the governor's strong easing stance has led to a rapid fall in the currency, fueling concerns among businesses and households ahead of a key national election for Prime Minister Fumio Kishida.

The BOJ's comments on the yen weren't highly specific, but were enough to keep markets relatively calm. It cited developments in financial and foreign exchange markets and their impact on the economy and prices as a risk alongside commodities, Covid-19, the war in Ukraine and overseas economic developments.

The remarks follow a statement issued a week ago by the central bank, finance ministry and financial watchdog, warning against sharp currency movements.

"The BOJ added language about foreign exchange markets following the earlier statement from the three-party gathering. That tells me they are getting more cautious and don't want the yen to tumble to 140," said Mari Iwashita, chief market economist at Daiwa Securities. "Unless the government changes its stance on the BOJ's role, the BOJ can't initiate major changes by itself. I think that's what foreign investors find hard to understand."

Japan Spells Out Warning on Forex With Yen Near 1998 Low

Foreign funds have led the charge in betting against both the currency and the BOJ's capacity to maintain yield-curve control. Speculators pushed Japan's bond futures to the brink of a trading halt earlier in the week, as part of bets the BOJ's pledge to cap yields at 0.25% is unsustainable.

The yen was at around 133.90 at lunchtime against the dollar compared with 133.41 immediately before the decision after sharp gyrations in both directions. It remained off Wednesday's 24-year low. After a battering earlier in the week, the currency has enjoyed some support after the Fed's decision led to concerns over a possible US recession.

Bets the Bank of Japan Will Break Are Popping Up Across Markets

The BOJ downgraded its assessment on production, exports and overseas economies, while taking an improved view of consumer spending. The downgrades offer some support for its view that the economy still needs help to recover.

The Fed raised interest rates by 75 basis points Wednesday, and more hikes are expected to come in the months ahead. The European Central Bank is en route to ditching negative rates by the end of September as it pledged to curb market stress at an emergency meeting this week. The Swiss National Bank surprised Thursday with the first rate increase in 15 years, while the Bank of England also pushed up rates again.

"The only concession made by the BOJ was a rare reference to the yen in its statement," said David Forrester, a senior foreign-exchange strategist at Credit Agricole CIB in Hong Kong. "It will be important to see what Kuroda meant by 'pay due attention to currencies' in his press conference later today. I suspect the focus will be its impact on inflation."

The BOJ has so far largely managed to defend its yield ceiling, but its framework is under strain. Last year markets managed to topple Australia's version of yield curve control.

In Japan, the central bank remains some way off the annual bond-buying pace of 80 trillion yen ($590 billion) that was once a target for Kuroda. Still, it would reach that mark in around 36 working days via its fixed-rate buying if it is forced to scoop up bonds at the same pace as Tuesday on a daily basis.

"The BOJ is likely to remain under attack from market at least toward the next Fed meeting in July," Kobayashi said. "The battle isn't over yet."

(Adds economist comments, charts and bond moves.)

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