The Bank of Japan continues to ignore the wave of "water withdrawals" from major central banks around the world and the market's concentrated pressure on the yen and Japanese government bonds, insisting on maintaining interest rates at negative levels and maintaining the Bank of Japan's government bond yield curve control measures.
Zhitong Finance APP learned that a statement released by the Bank of Japan today showed that the central bank retained the policy settings of controlling the yield curve and purchasing assets, while maintaining the benchmark interest rate at a historical low of -0.1%, which is closely related to the economy. Scientists generally agree. The Bank of Japan also stated that it will continue to purchase 10-year Japanese government bonds near the 0.25% yield level every working day, and it expects the benchmark policy rate to remain near the "current or lower" level.
After the yen rapidly depreciated to near a 24-year low earlier this week, the Bank of Japan added exchange rate to its risk management list for the first time since 2012, which has dealt a blow to yen bears. Preventing the Japanese yen exchange rate from weakening further.
The Bank of Japan maintained its dovish policy, and the yen fell slightly.
Major central banks racked their brains to "collect water," but the Bank of Japan always insisted on "releasing water."
After the decision was announced, the yen exchange rate (USD against yen) fell sharply. It then recovered slightly, but did not see the sustained decline expected by yen bears. Boosted by the Bank of Japan's statement, the 10-year Japanese government bond yield once fell below the 0.25% upper limit (as low as 0.23%). Before the statement was released, it hit the highest level since the target upper limit set by the Bank of Japan.
The moves in both important financial assets suggest that the Bank of Japan is seeing relatively optimistic results amid frequent attacks by Yen and JGB shorts this week. Before Japan announced its latest monetary policy decision, various possibilities such as policy adjustments or a financial market collapse were on the table.
Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research & Consulting, said: " Haruhiko Kuroda stated firmly and clearly that he will not give in to the constant pressure from the bearish forces." "By sticking to the goal of stabilizing inflation, Kuroda Haruhiko has reassured the market Demonstrating firm determination to continue to implement loose policies."
In his last year as the governor of the Bank of Japan, as major central banks competed to raise interest rates and control inflation, the market expressed concern that the Bank of Japan would abandon the "curve control theory" of yields. The bets are getting louder, and Kuroda has resisted pressure to normalize policy. Haruhiko Kuroda insisted that Japan's economy still needs monetary policy support to recover from the new crown epidemic, and Japan's inflation needs stronger wage growth to stabilize in order to normalize policy.
Japan's inflation level is in sharp contrast to other major economies
The Bank of Japan's latest view on the direction of the yen is actually not specific, but it is enough to keep the market relatively calm. The Bank of Japan pointed out that developments in financial and foreign exchange markets and their impact on the economy and prices are as much a risk as commodities, the new crown epidemic, the Russia-Ukraine conflict and overseas economic developments.
"The Bank of Japan's statement after the meeting of the three major financial institutions showed that the Bank of Japan increased its rhetoric about the foreign exchange market. This shows that the Bank of Japan is becoming more cautious and does not want the yen to fall to 140," said Daiwa Securities Chief Market economist Mari Iwashita said. "Unless the government changes its stance on the role of the Bank of Japan, the Bank of Japan cannot initiate major changes on its own. I think this is difficult for foreign investors to understand."
Haruhiko Kuroda revealed similar information at a press conference on Friday afternoon , insists now is not the time to tighten monetary policy like other overseas central banks. "It's simple: raising interest rates while Japan's economy is still on the road to recovery and gross domestic product has not returned to pre-COVID levels would mean further deterioration in the economy," he said. "This will risk triggering a sharp economic contraction."
In addition, the Bank of Japan lowered its assessment of production, exports and overseas economies, while its view of Japanese consumer spending improved. Analysts pointed out that the lower assessment is a sign of Japan's economic recovery. The view that monetary policy support is still needed provides support.
The Bank of Japan is now at odds with the pace of major central banks around the world in accelerating tightening of monetary policy. The Federal Reserve raised interest rates by 75 basis points on Wednesday local time, and is expected to raise interest rates significantly in the coming months. The European Central Bank is expected to abandon its negative interest rate policy for many years before the end of September. The Swiss National Bank unexpectedly announced its first interest rate hike in 15 years on Thursday, and the Bank of England announced its fifth consecutive interest rate hike.
The battle between the Bank of Japan and international short sellers continues
Foreign Hedge fund has taken the lead in making strong bets on the yen and the Bank of Japan's ability to maintain yield curve control. This week, speculators pushed Japanese government bond futures into the suspension area, mainly because in their view, according to economic principles, the Bank of Japan's commitment to control yields at 0.25% would be "unsustainable."
On June 15, Japanese bond short sellers started a head-on confrontation with the Bank of Japan, and the short sellers finally won. On that day, Japan's 10-year government bond futures plummeted, and trading was suspended twice during the session. However, today, boosted by the Bank of Japan's statement, some Japanese bond shorts began to turn to long positions. The 10-year Japanese government bond yield once fell below the upper limit of 0.25%. Before the announcement of the statement, it hit the highest level since the Bank of Japan set an upward target. At the highest level, the Bank of Japan is very resolute: it will continue to purchase 10-year Japanese government bonds near the 0.25% yield level every working day.
Japan’s benchmark bond yields will trade within tolerance
The yen found some support after taking a beating earlier this week as the Fed’s decision stoked concerns that the United States could slip into recession, which in turn supported the The safe-haven Japanese yen. After the Bank of Japan announced the interest rate decision, the Japanese yen exchange rate has increased in volatility, but it has not yet reached the 135-140 expectations of the short sellers. The ratio of the US dollar to the Japanese yen has been going back and forth between 1% and 1.8%. As of press time, the US dollar against the Japanese yen has fluctuated The yuan rose 1.70% to 134.45 yen.
The Bank of Japan has so far largely succeeded in defending its cap on Japanese government bond yields, but its framework remains under pressure despite continued increases in overseas market interest rates and bond yields. Last year, the market successfully overturned the Reserve Bank of Australia’s control theory of the government bond yield curve.
It is understood that the Bank of Japan is still some way away from the annual bond purchase scale of 80 trillion yen (approximately US$590 billion) once set by Haruhiko Kuroda. However, if the BOJ is forced to buy government bonds at the same daily pace as Tuesday, it would take about 36 working days to reach that level through fixed-rate bond purchases.
Late in the afternoon local time, the Bank of Japan announced that it will conduct fixed-rate purchase operations for the cheapest securities closely related to futures over an extended period starting next Monday.
"The Bank of Japan may continue to be impacted by market shocks at least until the next Federal Reserve interest rate meeting in July," Kobayashi said. "The battle is not over yet."
