The Bank of Japan held interest rates steady on Tuesday but moved to add more flexibility to the policy framework for its stimulus programme – moves which saw global bonds rally after 10 days of uncertainty on speculation the central bank would tighten its massive easing program.
In fact the central bank has added flexibility to its quantitative easing campaign rather than any tightening.
Japan’s central bank has in fact ignored the clamour from markets and media (led by some reports in the Financial Times) to join the global move towards tighter policy among the world’s heavy-hitting central banks. The European Central Bank says it will end its easing campaign later this year, the US Federal reserve is well into a series of increases in its key rate (but may not move rates at the current meeting underway this week), and the Bank of England will look at another rate rise at its meeting on Thursday.
But not so the Bank of Japan. It announced yesterday that overnight interest rates would remain at minus 0.1% and that 10-year bond yields would stay capped at about zero per cent.
“The BOJ intends to maintain current extremely low levels of short- and long-term rates for an extended period of time,” taking into account uncertainties over the outlook including the effect on the economy of next year’s scheduled sales tax hike, the bank said in the statement.
However, the bank said it would allow for greater movement of the yield on 10-year Japanese government bonds and said it would “revise the purchase amount of each ETF (Exchange Traded Fund) and increase that of ETFs” that track the Topix, a shift further away from focus on the more volatile price-based Nikkei 225 index.
On Monday yield on Japan’s 10-year government bonds hit an 18-month high amid speculation the BoJ might tighten its multi-trillion yen easing program, prompting the central bank to resolve to cap bond yields within a target range in its third intervention in the market in a week.
