Bank of Japan Holds Steady on Interest Rates, Plans JGB Purchase Reduction
- Interest Rates Unchanged:
BoJ keeps its key rate at 0% to 0.1%, continuing its cautious stance.
- Planned Reduction in Bond Purchases: Indications of a decrease in JGB purchases starting after the July meeting to stabilize the bond market.
BoJ Holds Rates at 0%-0.1%, Pausing After Historic March Hike
The Bank of Japan (BoJ) concluded its two-day monetary policy meeting on June 14, making significant announcements regarding its future monetary policy stance, particularly in terms of interest rates and government bond purchases.
The BoJ decided to maintain its benchmark short-term interest rate at between 0% and 0.1%, as widely expected by market participants. This decision follows the BoJ's first rate hike in 17 years, which occurred in March 2024, ending the world's last negative rate regime.
A key highlight of the meeting was the BoJ's indication that it could reduce its purchases of Japanese government bonds (JGBs) after its next monetary policy meeting, scheduled for July 30 and 31. The decision to reduce JGB purchases was passed with an 8-1 majority vote, with board member Nakamura Toyoaki disagreeing. Toyoaki argued that the BoJ should only decide to reduce JGB purchases after reassessing developments in economic activity and prices in the July outlook report.
BoJ's Decision Weakens Yen Against USD
Following the BoJ's decision, the Japanese yen weakened by 0.52% to 157.84 against the US dollar, while the yield on 10-year JGBs fell by 44 basis points to 0.924. The BoJ's large-scale purchases of JGBs have helped stabilize 10-year JGB yields at around the 1% level, but this has also put additional downward pressure on the yen. The yen's persistent weakness has raised concerns, prompting the BoJ to intervene to prop up the currency when it slipped to a 34-year low in late April.
BoJ Governor Kazuo Ueda favored reducing JGB purchases in a foreseeable manner while ensuring flexibility to maintain bond market stability. The reduction of JGB purchases will be of considerable volume, and the specific amount and framework will be decided after collecting input from market participants. Governor Ueda also noted that it is conceivable to adjust rates earlier if the price outlook is revised upward or if upside risks heighten.
The BoJ's decision highlights the significant interest rate gap between Japan and the US, where the Federal Reserve's rates are much higher. The BoJ sees accelerating inflation positively, aiming for its 2% goal, though it hasn't been reached in a stable, sustainable way.