BOJ Doubles Down On Super-easy Policy; Yen Hits 20-yr Lows, Bonds Rally

The Bank of Japan on Thursday doubled down on its commitment to maintain its massive stimulus programme and a pledge to keep interest rates ultra-low, triggering a fresh sell-off in the yen and sending government bonds rallying.

Reinforcing its resolve to support a fragile economy even as sharp rises in raw material costs push up inflation, the BOJ also said it will offer to buy unlimited amounts of 10-year government bonds to defend an implicit 0.25% cap around its zero target every market day.

The BOJ's commitment to its zero-rate programme puts it at odds with major economies that are shifting toward tighter monetary policy, although inflation in Japan is expected to creep up towards the central bank's 2% target.

"The key announcement is the commitment to conducting fixed-rate operations every day," said Bart Wakabayashi, co-branch manager at State Street Bank in Tokyo.

"I think they are trying to make the point here that we're ready to act at any second. They've quadrupled down on their commitment to this."

The doubling-down of BOJ's commitment to keeping policy accommodative drove the yen to a fresh two-decade low, breaching just above 130 to the dollar, and boosted Tokyo share prices.

Yields on the benchmark 10-year Japanese government bonds slipped to a more than three-week low of 0.215% immediately after the BOJ announcement.

The market reaction partly reflects heightened speculation ahead Thursday's BOJ meeting that it could allow long-term rates to rise more or tweak its dovish policy guidance to combat yen declines, as some lawmakers fret further falls in the currency could hurt the economy by inflating import costs.

As widely expected, the BOJ left unchanged its -0.1% target for short-term interest rates and a pledge to guide the 10-year bond yield around 0%.

"The BOJ expects short- and long-term policy interest rates to remain at their present or lower levels," the bank said in a statement, leaving unchanged the dovish guidance from the previous meeting in March.

RISING INFLATIONARY PRESSURE

Analysts expect Japan's economic growth to have stalled in the first quarter, and then rebounding modestly in April-June, as caution over the pandemic and rising living costs hurt consumption.

In fresh quarterly forecasts, the central bank projected core consumer inflation to hit 1.9% in the current fiscal year before moderating to 1.1% in fiscal 2023 and 2024 - a sign it sees current cost-push price rises as transitory.

In a nod to rising inflationary pressure, however, the BOJ said wage and price increases were expected to broaden as the economy continues to recover.

"Risks to prices are skewed to the upside for the time being, mainly reflecting uncertainties over energy prices, but are generally balanced thereafter," the BOJ said in its quarterly outlook report.

"The rise in underlying inflation is likely to further push up medium- and long-term inflation expectations," it said.

BOJ officials see developments in long-term price expectations as crucial to judging whether inflation becomes embedded and warrants withdrawing monetary stimulus.

Core consumer inflation, which hit 0.8% in March, is set to accelerate to around 2% from April, though the rise will be driven largely by rising fuel costs and the dissipating effect of past cellphone fee cuts - rather than from higher wages, or underlying demand.

Some analysts say the markets could challenge the BOJ's ultra-easy policy commitment.

"There's no sign at all that prices are stably going to rise by 2% so everyone is wondering whether it's really good to keep going as it is. Markets could attack (the BOJ's unlimited bond buying)," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.