Japanese yen tumbles, benchmark bond yields fall back to target as BOJ holds

THE Japanese yen tumbled as much as 1.7 per cent and the benchmark 10 year government bond yield fell on Friday (Jun 17) after the Bank of Japan (BOJ) underscored its commitment to ultra loose monetary policy, leaving it the world’s last dovish major central bank.

The move should offer a modicum of relief to global markets already jolted this week by a hefty interest rate rise by the US Federal Reserve and a surprise move by previous dove the Swiss National Bank on Thursday, which had spurred some speculation the BOJ could tweak its stance.

But the BOJ maintained its massive stimulus and said it would offer to buy unlimited amounts of 10-year Japanese government bonds (JGBs) at 0.25 per cent every business day, repeating the guidance on market operations it made in April.

Low inflation in Japan by global standards allows the BOJ to maintain ultra loose monetary policy. This week the central bank has been stepping into markets to defend the implicit 0.25 per cent benchmark bond yield cap.

That yield rose to as high as 0.268 per cent on Friday ahead of the BOJ’s meeting as investors speculated the BOJ might tweak its yield curve control policy, but was last back at 0.25 per cent.

The dollar climbed as high as 134.64 yen following the announcement, not far from its 24-year low of 135.6 yen hit earlier this week. It was last up 1.25 per cent at 133.8 yen.

The dollar has climbed 15 per cent so far this year against the yen this year, as the gap between Japanese and overseas interest rates grows ever wider.

Dollar/yen volatility reached its highest in 2 years ahead of the meeting.

Japan’s Nikkei share average was down 2.17 per cent ahead of the decision announcement, which came during the midday break.

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“Japan’s case is different from that elsewhere, and until they see some kind of wage growth or services prices rising, they are not going to easily move on monetary policy,” said Min Joo Kang, senior economist for South Korea and Japan at ING.

“The currency market will be the first to react, and move back to more of a 135 level, though we see heavy resistance above that.”

She said she thought the market would try to push past the 0.25 per cent yield cap for the 10-year bond, “but we don’t think (BOJ Governor Haruhiko) Kuroda will even change yield curve control any time soon”.

A significant change in policy was not expected by investors, but the meeting was closely watched because the consequences had the Bank of Japan abandoned its policy of yield curve control would have been felt around markets.

“When that peg eventually breaks, markets are going to get hit hard. Japan is currently a source of ultra-cheap financing in a world of rising rates, and with a currency that is only going one way - down. If both reverse at once,… ouch!” said analysts at Rabobank in a note ahead of the BOJ’s decision.

The Swiss National Bank on Thursday raised its policy interest rate for the first time in 15 years in a surprise move, and the Bank of England raised rates for the firth time in succession.

The day before the US Federal Reserve increased rates by 75 basis points, its largest increase at a single meeting since 1994.

Hurt by fears of higher rates, world stocks are down 5.7 per cent for the week so far, on course for the steepest weekly percentage drop since pandemic driven-sell off of March 2020. REUTERS