Bank of Japan keeps low rates as Kuroda sticks to script at swan song meeting

The Bank of Japan (BOJ) maintained ultra-low interest rates on Friday and held off making changes to its controversial bond yield control policy, leaving options open ahead of a leadership transition in April.

Though widely expected by most analysts, the decision sent the yen and local bond yields tumbling as some investors unwound bets retiring central bank governor Haruhiko Kuroda would tweak the yield curve control (YCC) at his last policy meeting.

Kuroda leaves the bank with a mixed legacy: His massive stimulus is praised for pulling the economy out of deflation, but straining bank profits and distorting market function with prolonged low interest rates.

At its two-day meeting that ended on Friday, the BOJ maintained its short-term interest rate target at -0.1% and that for the 10-year bond yield around 0%.

It also left unchanged a band set around the 10-year yield target that allows the yield to rise up to 0.5%.

“While we did not discount the possibility of a widening of the band to secure a smooth leadership transition, Kuroda appears to have avoided a sharp rise in JGB yields before the end of the fiscal year,” said Norihiro Yamaguchi, senior economist at Oxford Economics.

“The decision to uphold policy rates comes at a cost. The BOJ will be forced to continue its massive JGB purchases to stem speculation of additional YCC tweaks, which will worsen market liquidity,” he said.

Market reaction

The yen was last down about 0.49% at 136.78 against the dollar, trimming losses after a knee-jerk plunge of as much as 0.6% after the no-surprises decision.

The benchmark 10-year JGB yield pulled back sharply from the BOJ’s 0.5% ceiling to stand at 0.445%, while the Nikkei average briefly lost 1.23% due to declines in bank shares.

Many investors expect the central bank to phase out YCC when Kuroda’s successor, Kazuo Ueda, takes the helm in April.

“Ueda won’t abruptly move and probably wait until his second meeting in June, in changing forward guidance and YCC,” said Masamichi Adachi, senior Japan economist at UBS Securities.

“The BOJ will likely abandon its 10-year bond yield target, while maintaining negative interest rates, to arrest distortions in the yield curve,” he said.

For now, the BOJ maintained its dovish guidance on the future policy path, saying that it expects short- and long-term policy rates to remain “at their present or lower levels.”

The BOJ kept unchanged its view Japan’s economy will likely recover. But it offered a bleaker view than in January on output and exports to say they were “moving sideways” in a nod to recent weaknesses in factory production and overseas demand.

In January, the central bank said output and exports were increasing as a trend.

Ueda up next

With inflation exceeding its 2% target, the BOJ has been forced to ramp up bond buying to defend the 0.5% cap set for the 10-year bond yield — at the cost of distorting the shape of the yield curve and causing dysfunction in the bond market.

Kuroda has repeatedly said consumer inflation, now running at double the pace of the BOJ’s 2% target, will begin to slow as the effect of past spikes in fuel and raw material prices fades.

Data released on Friday showed Japan’s wholesale prices rose 8.2% in February from a year earlier to mark the second straight month of year-on-year slowdown, heightening the chance the rise in consumer inflation will start to moderate in coming months.

In parliament hearings last month, Ueda echoed Kuroda’s calls to keep ultra-loose policy. But the incoming governor said he had ideas on how to exit low rates, and was open to the idea of re-assessing the current policy framework.

A majority of economists polled by Reuters expect the BOJ to end YCC this year with half saying Ueda will carry out tweaks to the policy within three months.

The upper house of parliament on Friday approved the government’s appointment of Ueda and his two new deputies, Shinichi Uchida and Ryozo Himino, finalizing the confirmation of the new BOJ leadership.

Ueda will chair his first policy meeting on April 27 to 28, when the board will produce closely watched, fresh quarterly growth and price forecasts extending through fiscal 2025.