TOKYO (AFP) – The Bank of Japan (BoJ) yesterday eased its grip on its ultra-loose monetary policy in a small step towards normalisation as inflation accelerates and the yen comes under pressure against other major currencies.
The central bank has for years embarked on a process known as yield curve control (YCC) where it allows government bonds to move in a narrow band as part of a drive to boost the long-struggling economy.
However, after a closely watched meeting, it said it would allow “greater flexibility” in the market as it hiked its inflation forecast for the current fiscal year.
Still, officials said it did not mean the bank was abandoning its monetary policy – which analysts have warned was looking increasingly unsustainable – saying it would maintain its massive asset-buying measures.
Ten-year JGB yields would be allowed to “fluctuate in the range of around plus and minus 0.5 percentage points from the target level”, the bank said.
But it will “conduct yield curve control with greater flexibility regarding the upper and lower bounds of the range as references, not as rigid limits”, the bank said.
“The bank will offer to purchase 10-year JGBs at 1.0 per cent every business day through fixed-rate purchase operations,” it added.
Market expectations fluctuated in the lead up to the meeting over whether the bank would tinker with its signature stimulus policies after the two-day meeting chaired by governor Kazuo Ueda, who took the helm in April.
“Allowing greater flexibility in YCC will help us respond to fluctuation risks more expeditiously, improve the sustainability of monetary loosening and realise the two per cent inflation target in a stable and sustainable manner that comes with wage increases,” Ueda told a press conference.
“If the long-term interest rate were to be rigorously capped at 0.5 per cent, that could affect the way the bond market functions or bring more volatility in the financial market,” he said.
“We hope that allowing more flexibility in YCC could help ease these concerns.”
The yen initially weakened to JPY139.95 per dollar after the announcement, from around JPY139.12 in the morning, and was later hovering at around JPY139.48.
The currency has been hammered for more than a year as the BoJ refused to shift from its policy, even as central banks around the world pushed up interest rates to fight surging inflation.
The benchmark Nikkei index sank more than two per cent at one point on the prospect of higher borrowing costs. The BoJ took a similar measure in December when it expanded the YCC range to around plus or minus 0.5 percentage points, from a range of plus or minus 0.25 percentage points. The central bank faces the challenge of balancing the need to shore up the economy and keep its monetary policy sustainable in the long term.
Analysts have said YCC is increasingly harming the economy by skewing the bond market and accelerating the yen’s weakness, prompting inflation of imported goods.
