BoJ sets new target for longer-term interest rates, yen rises

Rate-setters at Japan´s central bank set themselves a new target for longer-term interest rates as part of their fight against deflation, as they moved away from policies focusing on expansion of the monetary base and towards influencing the shape of the government bond yield curve.

Following a comprehensive review of its policies, the Bank of Japan decided it would aim to keep the yield on the benchmark 10-year debt issued by Tokyo at about zero per cent, as it continued to aim at lifting consumer price inflation back up to the 2.0% monetary policy target.

A target for repurchasing 80trn yen in Japanese government bonds per year would now be a flexible target and would be allowed to fluctuate in the short-term as a result of policymakers´ new focus on bond yields, the BoJ said.

Another one of the BoJ´s targets, that for the average maturity of its holdings of JGBs was dropped, giving it more room for manouvre whne trying to manage the specific yield levels on bonds.

The -0.1% rate applied to bank´s deposits at the Bank of Japan was unchanged.

Nevertheless, the BoJ kept the door open to future cuts in the deposit rate and further increases in the so-called monetary base should they be deemed necessary.

As of 0731 BST, dollar yen was up by 0.78% to 102.36 and the yield on the benchmark 10-year JGB higher by five basis points to -0.02%, with the latter having hit an intra-session high of 0.01%.

Wednesday's BoJ decision to shift its monetary policy regime was in part an admission that base monetary expansion itself did little to ease monetary conditions and that Japan needed a steeper yield curve in order to support the economy, said Tomoya Masanao, head of portfolio management Japan at PIMCO.

"The actual yield curve should not be too flat relative to the neutral curve otherwise the economy will be negatively affected through weakening of financial intermediation.

"Today’s policy decision is marginally positive for bank stocks and other risk assets for the short-term as the bank refrained from cutting the short-term rate to a further negative level, but the sustainability of the risk asset rally is questionable. The BOJ’s policy exhaustion is increasingly clear. Compressed risk premium should be re-priced to some extent," Masanao said.

"We do not see today’s BoJ decision about the introduction of “QQE with yield-curve control” as changing our medium-term bearish view on USD-JPY. The pair has rallied on the back of the decision, but we think this is mainly driven by extended short-term speculative shorts closing rather than the market re-adopting a bearish view on the yen.

"If anything, the failure by the central bank to outright expand (or firmly commit to expanding) the monetary base over and above what has already been announced (and priced in by the market) shows that any “shock and awe” is highly unlikely in the foreseeable future," analysts at Unicredit said in a research note sent to clients.