TOKYO- The Bank of Japan heralded the start of a slow shift away from decades of massive monetary stimulus on Friday, allowing the country’s interest rates to rise more freely in line with increasing inflation and economic growth.
In what some analysts said could be a seismic shift for global financial markets, the BOJ made its bond yield control policy more flexible and loosened its defense of a long-term interest rate cap.
Global markets saw the move as Japan coming into line with other major central banks, which have aggressively tightened monetary policy to beat soaring inflation, after decades of aggressive stimulus in an effort to reflate growth.
While the BOJ kept interest rates at ultra-low levels and stressed the need to maintain support for the economy, it said the tweak to its bond yield curve control scheme (YCC) would allow it to respond “nimbly” to risks including rising price pressures.
BOJ Governor Kazuo Ueda brushed aside the view that the move was a step towards policy normalization, instead describing it as a pre-emptive move against the risk of too-high inflation.
But he also said the bank could tweak policy further if the likelihood of sustainably hitting its 2 percent inflation target heightens, underscoring the sharper focus on price pressures.
“It is an important step towards eventual disbandment” of YCC, said Tom Nash, portfolio manager at UBS Asset Management in Sydney.
The BOJ kept unchanged its short-term rate target at -0.1 percent and that for the 10-year government bond yield around 0 percent .
It also maintained guidance allowing the 10-year yield to move 0.5 percent around the 0 percent target, but said those would now be “references” rather than “rigid limits”.
The BOJ said it would offer to buy 10-year Japanese government bonds at 1.0 percent in fixed-rate operations, instead of the previous rate of 0.5 percent , signaling that it would now tolerate a rise in the 10-year yield to as much as 1.0 percent.
While some investors had expected a modest change in the BOJ’s guidance, the announcement shook financial markets which have grown used to years of its ultra-conservative policy.
Japan’s benchmark bond yield soared to a nine-year high. The yen strengthened 1.2 percent to as much as 138.05 per dollar before weakening 1 percent to 141.20. – Reuters
