Bank of Japan keeps rates steady, ups ETF purchases

The Bank of Japan kept interest rates unchanged at -0.1% on Friday but said it will increase purchases of exchange-traded funds.

The BoJ voted 7-2 to leave rates on hold, but said it will up its ETF purchases to an annual pace of Y6trn from Y3.3trn and double the size of its lending programme for local companies to $24bn.

The Bank also established a new facility for lending securities to be pledged as collateral for the US dollar funds-supplying operations.

The BoJ had cut its rate to below zero in a surprise move back in January.

The Bank said in a statement that the measures were to prevent uncertainties such as the Brexit vote and the slowdown in emerging economies from denting business confidence and consumer sentiment and to “ensure smooth funding in foreign currencies by Japanese firms and financial institutions".

Nomura said the ETF purchase increase was expected by the market and the inclusion of no other key measures, such as additional Japanese government bond purchases, a rate cut or negative rate loan support program, may be seen as a disappointment.

“Measures to ensure smooth USD funding should be positive for the profitability of Japanese financial institutions, while Japanese investors can keep their aggressive investment in foreign bonds. However, lower hedge costs will encourage them to keep their investment with FX hedged basis,” Nomura said.

The Japanese bank added that the BoJ’s easing on Friday focuses on improving risk sentiment (qualitative easing), especially among the banking sector, via new measures to alleviate USD funding, while avoiding policies that could have negative side effects on, or be particularly unpopular with, the banking sector.

Japanese finance minister Taro Aso welcomed the BoJ’s decision and said the government will continue to work with the central bank to defeat inflation.