The Bank of Japan (BoJ) announced that it will start trimming its bond purchases and will provide a detailed plan next month on reducing its nearly $5 trillion balance sheet. While it will continue to buy government bonds at the current pace of roughly $38 billion per month, the central bank will lay out details of its tapering plan for the next one to two years at its July meeting. The BoJ's decision to be cautious in adjusting monetary policy was seen as an indication that it is also cautious about raising rates. The central bank will collect views from market players before deciding on the long-term tapering plan at its next meeting. The BoJ kept its short-term policy rate target in a range of 0% to 0.1% and maintained its view that the economy continues to recover moderately. The yield on the benchmark 10-year Japanese government bond fell to 0.920% on the announcement, while the yen hit a one-month low of 157.895 to the dollar. The BoJ's efforts to normalize monetary policy come as other major central banks look to cut rates. However, weak consumption and doubts over the BoJ's view on inflation target pose challenges to the normalization process [d414ae83].
The potential end of the yield curve control program has raised expectations that the BoJ may raise interest rates for the first time since 2007. Higher wages and steady inflation have supported the case for this policy move. The BoJ's focus on the volume of purchases rather than the yield would mark a significant shift in its approach to monetary policy. This change could have implications for Japan's financial markets, particularly if it leads to adjustments in the daily fixed rate operation or changes to the 10-year bond yield targets [fb6b0c6f].
In response to the news, Japanese government bond (JGB) yields rose to new multi-year highs as investors digested the likelihood of the BoJ further adjusting its yield curve control policy. The benchmark 10-year JGB yield rose 2 basis points to 0.855%, its highest level since July 2013. One possibility being discussed is raising the 1% ceiling on the 10-year yield at the upcoming monetary policy meeting [5edb3f3d].
The potential adjustment to the yield curve control framework aims to deter speculators from targeting the yield ceiling and reduce the need for the BoJ to buy large amounts of JGBs. Currently, the long-term interest rate is capped at 1% and the central bank conducts fixed-rate buying operations to keep yields below that mark. By allowing 10-year Japanese government bond yields to rise above 1%, the BoJ hopes to achieve a more sustainable and balanced approach to its monetary policy [49fb7389].
According to economists polled by Reuters, the Bank of Japan (BOJ) is expected to start tapering the size of its bond-buying by the end of July. Nearly two-thirds of economists surveyed believe that the BOJ will make a decision on bond-buying reduction as early as the June meeting or in July. The BOJ is facing political pressure to slow the decline of the yen, which is blamed for higher import costs. Additionally, close to 90% of economists forecast an interest rate hike to at least 0.20% by the end of the year. The potential bond-buying reduction and interest rate hike reflect the BOJ's efforts to address economic challenges and manage its monetary policy more effectively [98ea4cdd].