Bank of Japan holds rates, remains cautious on unwinding

(Sharecast News) - The Bank of Japan kept lending rates on hold in its latest decision overnight on Friday, and announced plans to reduce its substantial bond purchases, with detailed tapering plans set to be released at its July meeting. That move would be a step toward unwinding its massive monetary stimulus, including a near-$5trn balance sheet.

At the same time, the BoJ said it would maintain its government bond purchasing pace at around JPY 6trn (£30m) per month.

The central bank's board unanimously voted to keep the short-term policy rate target between 0% and 0.1%, affirming a moderate economic recovery with steady consumption.

Governor Kazuo Ueda emphasised the importance of flexibility and market stability in the bond reduction plan.

The market had a cautious interpretation of the BoJ's decision, resulting in a decline in both the yen and Japanese bond yields.

JPY fell to a one-month low of 158.255 to the dollar, and the 10-year Japanese government bond yield dropped to 0.915%.

"The yen is weaker today understandably given the BoJ has once again failed to meet market - and our - expectations that had moved to expecting the commencement of a slower pace of purchases of JGBs from the current pace of close to JPY 6trn," said MUFG head of research Derek Halpenny.

"There was one dissenter - Toyoaki Nakamura; this is not hugely surprising and his dissent wasn't outright.

"He supports the slowing of JGB purchases but felt the steps to decide and agree a framework should only happen after assessing developments in economic activity and prices revealed in the July 2024 Outlook Report."

Halpenny said the delay by one meeting to the start of slower JGB buying ws "not hugely significant", but was more significant from a signalling perspective, underlining the bank's caution that raised expectations of a 'go-slow' reversal of its ultra-easy stance.

"The implication of this cautious decision means expectations of a July rate hike have also eased.

"Like other central banks there is a desire from the BoJ to separate monetary policy and short-term policy rate decisions from the policies on the balance sheet which central bankers like to communicate as more technical and not monetary policy-related.

"So the July meeting will be about JGB buying and hence a rate hike decision will come after that."

Reporting by Josh White for Sharecast.com.