(Reuters) – The Bank of Japan left interest rates unchanged on Friday but said it would reduce future bond purchases to allow long-term interest rates to move more freely.
At the end of the two-day policy meeting, the central bank said it would continue buying government bonds at the current pace for the time being. But she said she would present a specific plan to reduce purchases over the next year or two at a subsequent policy meeting in July.
Government bond yields fell on the news, while the yen hit a one-month low against the dollar.
Quotes:
Takayuki Miyajima, Senior Economist, Sony Financial Group, Tokyo
“Today's decision indicates that the Bank of Japan is very cautious about reducing the amount of its bond purchases, which means that the central bank is also cautious about raising interest rates. It is becoming less likely that the Bank of Japan will raise interest rates in July.”
Christopher Wong, Currency Strategist, OCBC, Singapore
“The Japanese yen is suffering after there was a belief that the Bank of Japan is in no hurry to normalize policies. This is likely to challenge the previous high of 160, and this should see increased risks of intervention. But intervention is at best an option to slow the pace of decline Currency depreciation and devaluation of the Japanese yen are not a trend reversal tool.
“For USD/JPY to decline more clearly, it will take the dollar to be kind or for the Bank of Japan to urgently signal normalization intent. None of this appears to be happening, and the path of least resistance for USD/JPY is the trend “Ascendant.”
Hirofumi Suzuki, Senior Forex Strategist, SMBC, Tokyo
“It is surprising that no decision was made on reducing bond purchases this time. At the next meeting, the Bank of Japan said that it would decide on a specific plan for the next year or two. Therefore, it is considered that the outcome was a rather pessimistic stance for the FX market, and it is likely that This will cause the value of the yen to fall.”
Matt Simpson, Senior Market Analyst, City Index, Brisbane
“The Bank of Japan announced that it would reduce bond purchasing “in the future,” sending Japanese government bonds higher to suppress yields and the Japanese yen.
“Prices have easily broken through their May highs, but it is clear that the market is closely monitoring the recent 'MoF intervention' level. Remember, the Finance Ministry claims that it is not focused on the exchange rate level – but is watching the levels if the yen depreciates too quickly.” Depending on their desire, they are likely to intervene.”
Yoshimasa Maruyama, Chief Market Economist, SMBC Nikko Securities, Tokyo
“I think there was not enough time for the Bank of Japan to discuss the plan to taper bond purchases. Naturally, the market was disappointed, but I think what the Bank of Japan is trying to do is a logical and fair process to move towards quantitative tightening.
“Communications between the Bank of Japan and the market were not going well, but it was good that the Bank of Japan put the process in terms of quantitative tightening.”
Ben Bennett, Asia Pacific Investment Strategist, Legal & General Investment Department, Hong Kong
“It is not surprising that they kept interest rates unchanged – it was very expected.
“They have already announced their intention to reduce bond holdings, but we will have to wait until their next policy meeting for the details. Of course, many things can happen between now and then. So the initial market reaction was to lower yields and lower yields.” Stock markets should like this combination of less tight policy and a weaker yen.
Yip Jun Rong, Market Strategist, IG, Singapore
“…There is bound to be some disappointment with the central bank’s delayed action, which again highlights its more patient stance on policy normalization. More clarity has also been provided, with guidance that markets can expect a more patient plan.” Detailed on tapering at the next meeting, the timeline for tapering over the next year or two or so does not suggest much urgency and suggests a more gradual pace of unwinding.
“This paves the way for Japanese stocks to rise and the Japanese yen to weaken, with relief that the policy steps taken will be more measured. This will likely provide the markets with a dovish view from the central bank and some acceptance from the authorities for a weaker policy. The yen to provide continued support to the economy, giving light Green for markets to resume finding momentum in carried yen trades.”
Tony Sycamore, Markets Analyst, IG, Sydney
“The Bank of Japan’s decision to postpone the gradual tapering of its bond purchasing program today continues its slow but deliberate march toward policy normalization. The real question is, will the currency market allow the Bank of Japan the luxury of exiting at its own pace, or will it do so? Will inaction today lead to a market rally To a high of 160.20 April in USD/JPY, supported by a hawkish FOMC meeting this week and the current low volatility risk-seeking regime?
Shuki Omori, Chief Japan Desk Strategist, Mizuho Securities Corporation, Tokyo
“It's a big surprise for market participants. There is less chance of a BOJ hike in July now. Japanese government bonds will continue to rise and get swaps for a while, and the yen will likely fall as a trend.
“The Bank of Japan was likely concerned about the real economy and therefore felt hesitant to tighten too quickly. Governor Ueda was always concerned about weak consumption, in my view. The Fed’s hawkish stance would have also helped in making this decision.”
“For short yen investors and carry trade investors, this is a very good opportunity to continue their bill trades and long USD/JPY trades, although FX investors will have to be careful about the Ministry of Finance again.”
Norihiro Yamaguchi, Senior Japan Economist, Oxford Department of Economics, Tokyo
“We did not expect them to reduce monthly purchases today, as the latest bond market survey showed little improvement. One possibility was that they would do so to improve market liquidity, but the survey result showed that it was not a serious problem.” .
“The Bank of Japan was unlikely to react to the yen’s recent weakness by raising interest rates, because it would put them in a ‘dog chasing its own tail’ position,” Alan Blinder said. If they had reacted, the market would have expected them to do so. To do the same next time.”
Ryotaro Kimura, fixed income strategist, AXA Investment Managers, Tokyo
“The BOJ’s cautious intention to avoid the risks of a sharp rise in interest rates due to too rapid a decline in government bond purchases, while also seeking to promote improvements in bond market functions, is evident in scheduling a meeting with market participants before the meeting to develop a plan to reduce bond purchases.” Governmental.
“…Unless the Bank of Japan decides on a pace of government bond cuts next month that is ‘less gradual’ than market participants expect, bond investors will likely be reluctant to advance the assumed pace of monetary policy normalization again.”
Kohei Okazaki, Senior Economist, Nomura Securities, Tokyo
“My first impression is that the Bank of Japan is buying time. If Japanese government bonds are easily downgraded under these conditions, there is the potential to create an environment where markets will be under pressure from anticipation. The Bank of Japan has taken measures to ward off such pressures.”
“The surprise this time is that although a decision was scheduled to be made at the next meeting, the plan to reduce Japanese government purchases over the next year or two will be decided there. Instead of making a flexible decision every time, the BOJ will decide that It wants to proceed with reducing purchases mechanically, thus limiting any speculation linking a weak yen to a reduction in Japanese government bonds.