Sound controls

BOJ to keep rates ultra-low and sound warning of yen weakness

  • BOJ expected to keep interest rate targets unchanged
  • Political decision expected between 02:30 and 04:00 GMT
  • BOJ may step up measures to defend yield cap
  • Governor Kuroda likely to warn of yen weakness for economy

TOKYO, June 17 (Reuters) – The Bank of Japan is expected to keep interest rates ultra-low on Friday and underscore its determination to support a fragile economy with massive stimulus, a move that could trigger a further decline in the yen by putting highlight a divergence of policy with the rest of the world.

While a modest technical adjustment to its yield cap or guidance on the future policy trajectory cannot be ruled out, the BOJ is likely to maintain its massive monetary support for now to ensure the economy is fully exited. doldrums.

Central banks across Europe raised interest rates on Thursday, some by an amount that shocked markets, following the U.S. Federal Reserve’s 75 basis point hike. Read more

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The likelihood that Japan will remain an outlier as global central banks tighten policy to fight inflation has pushed the yen to a 24-year low, threatening to chill consumption by raising import costs already rising.

But growing worries about yen weakness haven’t deterred the BOJ from defending an implied cap of 0.25% for its 10-year bond yield target by increasing bond purchases.

“We expect the BoJ to continue its efforts to achieve its inflation target in a stable and sustainable manner,” Finance Minister Shunichi Suzuki told reporters on Friday, signaling support for the Bank’s ultra-loose monetary policy. central bank.

At the two-day policy meeting ending Friday, the BOJ is expected to maintain its target of -0.1% for short-term rates and its promise to guide the 10-year yield around 0%.

The central bank could also strengthen its resolve to defend the upper limit of 0.25% by targeting a wider range of debt maturities for its unlimited fixed-rate bond purchase operation, which currently only covers bonds. 10 years, some analysts said.

“The BOJ could add a promise to conduct emergency market operations targeting notes for a wider range of maturities,” said Hiroshi Ugai, chief economist for Japan at JPMorgan Securities.

“The central bank has no choice but to do this to control bond market moves, although it probably doesn’t want to accelerate the dollar’s rise against the yen,” he said.

The yen rebounded against the dollar, which took a hit after Thursday’s surprise rate hike by the Swiss central bank. It was around 132.40 to the dollar in Asia on Friday.

The BOJ’s yield cap has come under attack from investors betting the central bank could cave to global market forces, as rising US yields drive long-term rates higher around the world.

The benchmark yield on 10-year Japanese government bonds (JGB) hit 0.265% on Friday, above the BOJ’s 0.25% cap and hitting the highest level since January 2016.

“The yen is facing near-term upside pressure on expectations, mainly among overseas players the BOJ could relinquish yield curve control and raise rates,” said Masafumi Yamamoto, chief market strategist. currencies at Mizuho Securities.

“But we expect the BOJ to maintain policy accommodation and even step up measures to rein in yield increases” with no signs of a broad-based acceleration in wage growth, he said.

The BOJ is caught in a dilemma. With Japanese inflation being much lower than that of Western economies, its objective is to support the still weak economy with low rates. But the accommodative policy triggered sharp falls in the yen, hurting an economy heavily dependent on imports of fuel and raw materials.

BOJ Governor Haruhiko Kuroda has repeatedly stressed the need to keep interest rates extremely loose and that the central bank will not target exchange rates to guide policy.

Kuroda will likely warn of a weak yen in his post-meeting briefing, for example pointing out the damage that sharp falls in the currency could inflict on the economy, analysts said.

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Reporting by Leika Kihara; Additional reporting by Tetsushi Kajimoto; Editing by Jacqueline Wong and Richard Pullin

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