The Bank of Japan widens the target band of the yield curve
The Bank of Japan (BoJ) announced the decisions taken at the monetary policy meeting that began yesterday and ended today.
Consequently, while keeping the policy rate unchanged at minus 0.1 percent, the bank decided to expand the bond yield band with a surprise move aimed at easing the costs of its long-standing loose monetary policy.
The BOJ said it will continue to buy unlimited amounts of 12 trillion yen annual government bonds and exchange-traded funds (ETFs), as well as 180 billion yen annual Japanese real estate investment funds (J-REITs).
The Bank also decided to change the management of yield curve control to improve market performance and encourage smoother yield curve formation. Consequently, the target band for the 10-year Japanese government bond, which was previously plus/minus 25 basis points, has been widened by 25 basis points to plus/minus 50 basis points.
BACK FROM LAJAS MONETARY POLICIES
The Bank cited the deterioration in the functioning of the bond markets, in line with the relationship between arbitrage transactions in the spot and futures markets and the yields of bonds with different maturities, as the reason for the decision targeting to a change in the fundamentals of the ultra-loose. monetary policy.
In the text of the decision, it was stated that volatility in foreign financial and capital markets has increased since the spring, and this situation has significantly affected the Japanese markets.
“Japanese Government Bond Yield; are benchmark rates for corporate bond yields, bank lending rates, and other funding rates. If these market conditions continue, it could have a negative impact on financial conditions, such as the issuance of corporate bonds. The Bank expects that the measures taken today will facilitate the transmission of the effects of monetary expansion within the framework of yield curve control through means such as corporate finance.
THE PURCHASES OF GOVERNMENT BONDS WILL INCREASE
Noting that the amount of government bond purchases will be increased further to encourage the formation of the proper yield curve for the new target band in the bank’s market transactions, the statement also stated that it will “provide prompt responses for all “. maturities by making purchases at a fixed rate”.
It was also reported that the Return Curve Controlled Monetary Expansion policy will be maintained until the inflation target of 2 percent is reached.
JAPAN STRENGTHENS AGAINST THE NEW DOLLAR
In the text, “The Bank will closely monitor the impact of the epidemic of the new type of coronavirus (Kovid-19) and will not hesitate to take additional expansive measures if necessary. In addition, interest rates are expected to remain at their current levels or lower in the short and long term”, which also drew attention.
The change in the BOJ’s yield curve target band came at a time when news intensified about the candidates to replace BoJ Chairman Haruhiko Kuroda, whose term is due to expire in April, and how a change would be discussed in monetary policy.
Following the announced decisions, the Japanese yen strengthened against the dollar. The dollar/yen parity stabilized at 133.2 after seeing the lowest level in the last 4 months with 133.1.
DROPPED EXCHANGES
Yen and bond yields rose sharply after the decision, while stock markets tumbled. The central bank’s decision was unexpected by investors who thought the bond yield band would not change until current BOJ chief Haruhiko Kuroda resigned in April.
Japan’s Nikkei index fell 2.5 percent after the decision. BOJ Chairman Kuroda is expected to hold a press conference at 09:30 to announce the decision. (AA, REUTERS)