 "Bank of Japan decides to trim bond buying, keep rates steady at 0-0.1%")
The Bank of Japan said on Friday it would start trimming its huge bond purchases and announce a detailed plan next month on reducing its nearly $5 trillion balance sheet, taking another step toward unwinding its massive monetary stimulus.
While it will continue to buy government bonds at the current pace of roughly 6 trillion yen ($38 billion) per month for now, the central bank decided to lay out details of its tapering plan for the next one to two years at its July meeting.
The plan to slow bond purchases was widely anticipated.
However, the lack of immediate details was seen by some investors as an indication the central bank will be cautious in adjusting monetary policy going forward. That dovish market interpretation sent the yen and Japanese bond yields lower.
"Today's decision suggests that the BOJ is very careful about reducing the bond buying amounts, which means the central bank is also cautious about raising rates," said Takayuki Miyajima, senior economist at Sony Financial Group. "It has become less likely that the BOJ will raise rates in July." The BOJ said it will collect views from market players, before deciding on the long-term tapering plan at its next meeting.
As widely expected, the BOJ kept its short-term policy rate target in a range of 0-0.1 per cent by a unanimous vote.
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The central bank also maintained its view the economy continues to recover moderately with consumption holding firm.
After the announcement, the yield on the benchmark 10-year Japanese government bond (JGB) fell to 0.915 per cent while the yen hit a more than one-month low of 158.255 to the dollar.
"In trimming bond buying, it's important to leave flexibility to ensure market stability, while doing so in a predictable form," BOJ Governor Kazuo Ueda said at a briefing after the meeting. "The size of reduction will likely be significant. But specific pace, framework and degree will be decided upon discussions with market participants."
Analysts' focus is now on whether recent economic weakness, particularly in the consumer sector, will affect the timing of the BOJ's next rate hike.
"It is possible that the BOJ got concerned about the real economy and thus felt reluctant to tighten too fast," said Shoki Omori, chief Japan desk strategist at Mizuho Securities, on the bank's decision to hold off on tapering immediately.
"Governor Ueda has been always worried about weakness in consumption, in my view," he said, adding there was now a smaller chance the BOJ would hike interest rates in July.
The BOJ exited negative rates and bond yield control in March in a landmark shift away from a decade-long, radical stimulus programme.
It has also dropped signs that it will keep raising short-term rates to levels that neither cool nor overheat the economy - seen by analysts as being somewhere between 1-2 per cent.
Many market participants expect the BOJ to raise rates again some time this year, though they are divided on the timing.
The central bank has also been under pressure to embark on quantitative tightening (QT) and scale back its massive balance sheet to ensure the effects of future rate hikes smoothly feed into the economy.
The BOJ's efforts to normalise monetary policy come as other major central banks, having already tightened monetary policy aggressively to combat soaring inflation, look to cut rates.
The Federal Reserve held interest rates steady on Wednesday and signalled the chance of a single cut this year. The European Central Bank cut interest rates last week for the first time since 2019.
However, the normalisation of Japan's still-loose monetary policy is clouded by weak consumption and doubts over the BOJ's view that robust domestic demand will keep inflation on track to durably hit its 2 per cent target.
Receding prospects of steady U.S. interest rate cuts may also keep the yen weak against the dollar, complicating the BOJ's policy deliberations.
Japan's battered currency has become a headache for policymakers by inflating import prices, which in turn boosts living costs and hurts consumption.
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)