By Noriyuki Suzuki,
The Bank of Japan on Tuesday further eased its grip on long-term yields in a small but symbolic step toward the end of a program designed to keep borrowing costs low but blamed for distorting the bond market.
At the end of a two-day meeting, the Policy Board redefined the ceiling of 1.0 percent, a defense line set by the BOJ in July, as "the upper bound" for 10-year Japanese government bond yields.
Despite the latest policy tweak, BOJ Governor Kazuo Ueda said he does not expect 10-year yields to rise sharply above 1.0 percent even if they better reflect economic fundamentals.
"Some progress" has been made toward attaining the central bank's 2 percent target, and nominal wages will likely continue rising, but the outlook is uncertain, making it necessary to maintain ultralow rates, he said.
The decision came as the BOJ raised its inflation outlook to 2.8 percent in both fiscal 2023 and 2024, meaning it would remain, at least on the surface, above the 2 percent inflation goal for three straight fiscal years.
"We didn't expect yields to near 1.0 percent so soon... but they have reached 0.9 percent. The biggest factor is that U.S. Treasury yields have been rising much faster than anticipated," Ueda told a post-meeting press conference.
The governor described the latest decision as a "preemptive" step against foreign exchange volatility and other future risks, adding that it is also meant to improve the functioning of bond markets.
The side effects of setting a rigid upper limit will increase when 10-year yields near that threshold because the BOJ would have to defend it by ramping up bond-buying.
"While no rigid cap will be set, I don't expect long-term yields to rise sharply higher from 1.0 percent," the BOJ chief said, adding that the central bank will adjust buying operations according to the pace of yield moves and their levels.
The yen plunged past the psychologically important barrier of 150 to the U.S. dollar after the BOJ decision, amid caution about another round of intervention by Japanese authorities. The yield on the benchmark 10-year government bond ended Tuesday at 0.950 percent after briefly hitting 0.955 percent, its highest since May 2013.
While the BOJ retained its dovish stance with a pledge to take additional easing steps if needed, the latest adjustment will likely bring into focus the issue of when it will move further toward policy normalization by scrapping the yield curve control program and ending negative rates.
The BOJ's conduct of monetary policy has become all the more complex in recent months as it has to grapple with the yen's persistent weakness, a byproduct of the central bank's monetary easing, and a bloated balance sheet due to massive bond-buying to keep borrowing costs at rock-bottom levels and attain stable inflation.
"The BOJ is taking steps much faster than I had expected toward gutting the yield curve control program," said Toru Suehiro, chief economist at Daiwa Securities.
"Long-term yields can move more freely from now, but this does not change the fact that the BOJ is continuing to buy massive amounts of government bonds," Suehiro said.
The BOJ maintained its yield curve control program, where short-term rates are set at minus 0.1 percent while 10-year yields are guided to around zero percent.
Under that framework, the BOJ sought to maintain the 10-year note's upper limit by offering to buy relevant bonds every business day, in principle.
Asked about the prospect of yield curve control and negative rates, Ueda said both measures will remain until the inflation goal is in sight.
Aggressive rate hikes by the Federal Reserve and the European Central Bank, among other major central banks, have sent bond yields higher.
Inflation expectations in Japan have "risen moderately," and the economy will continue to recover, according to the BOJ. However, it warned of extremely high uncertainty over the outlook and cited foreign exchange rate and commodity price developments as risks.
Some BOJ board members have voiced optimism over the outlook for sustained wage growth, a key factor in determining whether stable inflation can be achieved.
Still, in fiscal 2025, the final year of the current forecast period, core consumer price inflation will slow to 1.7 percent, a slight upward revision from its earlier forecast.
The outlook underscores the challenge faced by the BOJ in achieving the inflation target in a "stable and sustainable" manner, even after a decade of powerful monetary easing.
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