Normally the monetary policy stance of the Bank of Japan (BoJ) is a somewhat esoteric area of the financial markets, with the policies of the Reserve Bank here and especially the Fed in the US of more significance to investors large and small.
But amid the costs surge, the rush to lift interest rates and the energy price crisis after the Russian invasion of Ukraine 11 months ago, the BoJ has looked increasingly lonely as other central banks have lifted rates to try and contain inflationary pressures.
In late December the BoJ appeared to be joining the push to lift rates when it altered part of its near decade long yield control measure (that policy ended up failing here in Australia).
That change had the effect of a slight tightening of what remains the central bank’s very loose monetary policy.
In the wake of that decision, this week’s two-day monetary policy meeting of the BoJ was widely tipped to further tighten policy, perhaps even by confirming the higher interest rates in bond markets.
But nope, no change and on Wednesday the BoJ maintained its ultra-low interest rates, including its 0.5% cap for the 10-year bond yield, defying market expectations it would phase out its massive stimulus programme in the wake of rising inflationary pressure.
At a two-day policy meeting, the BoJ by a unanimous vote kept intact its yield curve control (YCC) targets, set at -0.1% for short-term interest rates and around 0% for the 10-year yield.
The central bank also made no change to its guidance that allows the 10-year bond yield to move 50 basis points either side of its 0 per cent target.
The decisions follow the BoJ’s surprise move last month to double the yield band (to allow bond yields to drift higher), a tweak that analysts say has failed to correct market distortions caused by its heavy bond buying (another $US33 billion on Monday and Tuesday of this week).
The late December tweak saw the value of the yen surge from near 40-year lows against the greenback with lots of speculation that it could go higher in the new year and after the January central bank meeting.
But the decision to keep settings unchanged sent the US dollar surging 2% against the yen in Asian trading on Wednesday afternoon, its biggest one-day percentage jump since June 17.
Japanese sharemarkets rose strongly with the key Nikkei index leaping 2.5% in afternoon trading.
Governor Haruhiko Kuroda’s said that the December move was a technical change and the central bank seems to be determined to continue its easing until it is convinced that a sustainable level of inflation (2%) is embedded in the Japanese economy.
Yesterday’s decision suggests that the BoJ won’t be changing policy any time soon.
It means Japan remains the one place in the world where ultra-cheap money is freely available for banks and corporates to help finance deals large and small.
But it is also destabilising global bond markets which had started 2023 very strongly with more and more investors convinced inflation had peaked and that central banks were approaching the end of their tightening moves.
But not the Bank of Japan – most analysts think the easy money / yield control regime will end and possibly whack global markets when it does. If the impact is dramatic, Australian markets and the dollar (which topped 70 US cents for a second time in a week yesterday) will feel the hit.
But could a change actually be closer than many people think?
Analysts point out that the market’s focus now shifts to the central bank’s March meeting, which will be the final one Kuroda chairs before his long term at the central bank ends in April.
A change in governor and a change in policy?
