(Reuters) - The Bank of Japan further loosened its grip on long-term interest rates by tweaking its bond yield control policy on Tuesday, taking another step towards ending its massive stimulus programme.
At the conclusion of its two-day policy meeting, the BOJ maintained its -0.1% target for short-term interest rates and that for the 10-year government bond yield around 0% set under yield curve control (YCC).
MARKET REACTION:
The yen slid nearly 0.7% against the dollar, past the 150 per dollar threshold to hit an intraday low of 150.12. The unit later pared some of those losses to stand at 149.95.
Japan's Nikkei share average flipped to gains after the BOJ added more flexibility to its YCC. The benchmark index was up 0.42% at 30,825.95.
The 10-year JGB futures fell as much as 0.36 points to 143.73 after the decision was announced, while the 10-year bond yield was unchanged at 0.930% from the midday close.
COMMENTS:
KYLE RODDA, SENIOR FINANCIAL MARKETS ANALYST, CAPITAL.COM, MELBOURNE
"It looks like the BOJ is taking the "softly, softly" approach here. The incrementalism was perhaps a surprise to markets given the speculation of an actual tweak. It still seems to be on the cards, but just not today. The decision has given the Nikkei a shot in the arm, and a bit of a reprieve from the many headwinds dragging the market lower."
MATT SIMPSON, SENIOR MARKET ANALYST, CITY INDEX, BRISBANE
"The fact that the USD/JPY has rallied suggests that markets were betting on the BOJ abandoning the YCC altogether. And to be fair, they may as well given that yields were set for 1% heading into the announcement. But it's also likely the BOJ have their finger on the intervention button to cap any runaway rally on USD/JPY."
CHARU CHANANA, MARKET STRATEGIST, SAXO, SINGAPORE
"It (the new reference range) suggests they will allow yields to rise above 1%, while still trying to keep the changes to policy very subdued. Speculation of an eventual removal of the YCC will continue to build.
"Inflation forecasts also not do not suggest the BOJ still buys the idea that inflation is more than transitory. Last week proved that USDJPY at 150 is not a line in the sand, and this could bring a test of 152. All eyes will now turn to the Fed later this week, with a dovish Fed being the only hope for a recovery in the yen for now."
NAKA MATSUZAWA, CHIEF MACRO STRATEGIST, NOMURA, TOKYO
"They've tried to stay as dovish as possible and not committed to additional policy changes like rate hikes. Although they raised the inflation forecast ... they still remain cautious on the 2% inflation target.
"I don't think this was a disappointment, because it's still a shift toward normalisation, in a way. But I think the currency market sees the balance between Japan and U.S. rates are leaning toward a stronger dollar and weaker yen.
"Previously there were talks in the market that they may set a yield target for the 10-year at 1.5%, compared with that ... it's a bit dovish. Nevertheless, this is working in a way to increase the volatility of the global rates market. It depends now how ... they operate on purchase operations."
TONY SYCAMORE, ANALYST, CITY INDEX, SYDNEY
"Today's decision will provide the BOJ with more flexibility and means it doesn't need to expand its balance sheet to defend a set cap. It's a clever change and it buys the BoJ time, ahead of further policy normalisation next year."
TAKAYUKI MIYAJIMA, SENIOR ECONOMIST AT SONY FINANCIAL GROUP IN TOKYO
"Overall, the decision was more dovish than the market had expected. I say so because even as the BOJ allows the 10-year JGB yield to cross 1%, it plans to deploy any measures, contain yields if it rises too fast.
"Its inflation forecast is also conservative, with core-core inflation forecast below 2% in 2024. This means it will still have a certain distance until the BOJ exit from the negative rate policy."
ROB CARNELL, ASIA-PACIFIC HEAD OF RESEARCH, ING, SINGAPORE
"It's a bit weird. Yes. And I'm not sure that the markets have correctly responded to it. They are now saying the 1% is a reference rate, which sounds like there's flexibility around that. They're blurring the edges of 1% for the 10-year JGB.
"I'm not entirely sure whether this (market reaction) is just because more had been priced in, and maybe the market had anticipated a bigger tweak than this. And so consequently, they're now unwinding that."
JEFF NG, HEAD OF ASIA MACRO STRATEGY, SMBC, SINGAPORE
"It looks like the BOJ is slowly progressing towards the yield curve control removal, so this is part of a series of moves for more flexibility as global yields stay elevated.
"Maybe markets were expecting more, or it could also be a (matter of) buy the rumour, sell the fact."
TOM NASH, PORTFOLIO MANAGER, UBS ASSET MANAGEMENT, SYDNEY
"(The) BOJ will buy some bonds around that (1%) level, but not unlimited and they've shown their hand. Through all the linguistic contortions, the fact is that they are dismantling YCC.
"A yield cap isn't a yield cap if you change it every time the market gets close."
SHOKI OMORI, CHIEF JAPAN DESK STRATEGIST, MIZUHO SECURITIES, TOKYO
"In light of the elevated inflation outlook - and higher U.S. rates outlook - the bank likely recognized the potential risk of inviting speculative activities, which could further drive interest rates upward. They needed to attempt to make fine-tuning adjustments in response.
"They didn't want to set a target such as 1.5% because this will just keep speculative investors challenging the BOJ.
"They wanted to see stronger wage growth (before making) a dynamic change in policy."
SHOTARO KUGO, ECONOMIST, DAIWA INSTITUTE OF RESEARCH, TOKYO
"What surprised me was the change to the fixed-rate purchase operations (in the footnote), which said the BOJ will decide the offer rate 'each time, taking account of market rates and other factors' from now on.
"The fixed-rate purchase operation was introduced to defend YCC's upper limit and has been a very powerful tool … Unshackling the fixed rate is another step toward the end of YCC and may be a more evident one than previous tweaks such as widening of the band."
IZURU KATO, CHIEF ECONOMIST, TOTAN RESEARCH, TOKYO
"Today's move was nothing, but a fine tuning aimed at fixing distortion in the market caused by a prolonged yield curve control.
"As prices likely overshoot projections in the next quarterly outlook in January, the Bank of Japan may be forced into unwinding negative interest rate policy and revert to zero-interest rate policy to avoid the risk of further yen weakening and of the economy falling into stagflation.
"As such, the central bank may not wait until the spring wage talks, but will likely move as early as January. I doubt the Japanese economy can achieve a virtuous growth of wages and price hikes anytime soon given that it will take time to enhance labour productivity while the risk of stagflation emerges in the economy."
MARCEL THIELIANT, HEAD OF ASIA-PACIFIC, CAPITAL ECONOMICS
"The Bank of Japan today de facto abolished YCC, and policymakers might call time on negative interest rates as soon as January. A casual reading of today's BOJ statement would suggest that policy settings were left unchanged - the bank continues to target a JGB yield of 0% and it retained its 1% yield cap.
"The bank, however, now sees that 1% cap as a "reference" and it will no longer enforce the cap by offering to buy unlimited amounts of bonds via fixed-rate auctions every day. Instead, the bank will only conduct fixed-rate auctions if that is "deemed necessary", and at a yield that takes into account market conditions rather than any pre-defined level. That means that the YCC is now de facto over, but it remains to be seen how rapidly the BOJ will slow its bond purchases."
FREDERIC NEUMANN, CHIEF ASIA ECONOMIST & CO-HEAD - GLOBAL RESEARCH, HSBC, HONG KONG
"The BoJ has taken the plunge and once again loosened the reins on bond yields. With the U.S. rates drifting higher in recent weeks, and the yen coming under pressure, the Bank of Japan officials are allowing greater flexibility to dampen exchange rate volatility. The higher inflation forecast by the BoJ for the current fiscal year reinforces the hawkish messages.
"Still, it's too early to expect a decisive change in other monetary policy measures, such as the policy rate, given that the BOJ will likely want to see more evidence of a sustained rise in wages, with next spring's Shunto wage negotiation results a key focus. The Bank of Japan could lift the negative policy rate to zero over the coming year. Global investors will pay heed to the Bank of Japan's policy decision today, which signals a further step towards global monetary policy normalization."
CHRISTOPHER WONG, CURRENCY STRATEGIST, OCBC, SINGAPORE
"The 1% is no longer a strict cap and that means they will allow JGB yields to rise above 1%. To some extent, this is as good as quietly allowing the YCC to fade in the background. The USD/JPY reaction is a reflection of the disappointment with BOJ's underwhelming tweak.
"It is likely just a matter of time when the BOJ moves away from the YCC, negative interest rate policy regime as inflationary pressures are rather sustained so far this year. Sentiment is improving and upward pressure on wage growth remains intact."