The BOJ doubles down on its ultra-simple policy; yen hits 20-year low, bonds rebound

* BOJ keeps interest rate targets unchanged

* Advice on keeping ultra-low rates intact

* Board revises inflation forecast up to nearly 2%

* The BOJ will offer unlimited purchases of fixed rate bonds daily

TOKYO, April 28 (Reuters) – The Bank of Japan on Thursday redoubled its pledge to maintain its massive stimulus program and its pledge to keep interest rates ultra-low, triggering another selloff in the yen and pushing government bonds higher. ‘State. .

Reinforcing its resolve to support a fragile economy even as sharp rises in commodity costs drive up inflation, the BOJ also said it will offer to buy unlimited amounts of 10-year government bonds for defend an implicit cap of 0.25% around its zero target in each market. daytime.

The BOJ’s commitment to its zero rate program puts it at odds with major economies turning to tighter monetary policy, even as inflation in Japan is expected to climb towards the 2% target of the central bank.

“The key announcement is the commitment to conduct fixed-rate trading every day,” said Bart Wakabayashi, co-branch manager at State Street Bank in Tokyo.

“I think they are trying to convey here that we are ready to act at any time. They have quadrupled their commitment to this.”

The doubling of the BOJ’s commitment to maintaining accommodative policy drove the yen to a new two-decade low, topping just above 130 to the dollar, and sent Tokyo stock prices higher.

Yields on benchmark Japanese 10-year government bonds fell to an over-three-week low of 0.215% immediately after the BOJ announcement.

The market reaction partly reflects heightened speculation ahead of Thursday’s BOJ meeting that it could allow long-term rates to rise further or adjust its dovish policy guidance to combat the yen’s decline as some Lawmakers fear that further declines in the currency could hurt the economy by inflating import costs.

As widely expected, the BOJ left unchanged its target of -0.1% for short-term interest rates and its promise to guide 10-year bond yields around 0%.

“The BOJ expects short-term and long-term policy interest rates to remain at or below current levels,” the bank said in a statement, leaving dovish guidance from the previous March meeting unchanged.

RISING INFLATIONARY PRESSURE

Analysts expect Japan’s economic growth to stagnate in the first quarter, then rebound slightly in April-June as caution over the pandemic and rising cost of living hurt consumption.

In new quarterly forecasts, the central bank expected core consumer inflation to hit 1.9% in the current fiscal year before moderating to 1.1% in fiscal years 2023 and 2024 – a sign that it views current price increases as transitory.

In a nod to rising inflationary pressures, however, the BOJ said wage and price increases should widen as the economy continues to recover.

“Price risks are tilted to the upside at the moment, primarily reflecting energy price uncertainties, but are generally balanced going forward,” the BOJ said in its quarterly outlook report.

“The rise in core inflation is likely to push medium to long-term inflation expectations even higher,” he said.

BOJ officials view changes in long-term price expectations as crucial in judging whether inflation is taking hold and warranting the withdrawal of monetary stimulus.

Core consumer inflation, which hit 0.8% in March, is expected to accelerate to around 2% from April, although the rise is largely due to higher fuel costs and to the dissipating effect of past reductions in mobile phone charges – rather than to higher wages, or underlying demand.

Some analysts say markets may challenge the BOJ’s ultra-easy policy engagement.

“There is no sign that prices are going to rise stably by 2%, so everyone is wondering if it is really good to continue like this. Markets could attack (the unlimited purchase of bonds of the BOJ),” said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. (Reporting by Leika Kihara; Additional reporting by Tetsushi Kajimoto, Daniel Leussink and Kantaro Komiya Editing by Shri Navaratnam)

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