Bank of Japan Governor Digs In for Standoff With Markets

Gov.

Haruhiko Kuroda

denied that the central bank he has led for nearly a decade was on the same road to monetary tightening traveled in 2022 by the Federal Reserve and the European Central Bank.

“I don’t think it is necessary to widen the range for the long-term yield,” Mr. Kuroda said at a news conference.  

The cap is part of a policy the BOJ calls yield curve control, which also includes a minus 0.1% short-term policy rate.

Although speculators have repeatedly pushed the 10-year yield slightly above the new cap in recent days, Mr. Kuroda said he expected market functioning to improve. He said it would take some time for yields to settle down because markets had grown accustomed to the old cap.

“Yield curve control is sufficiently sustainable,” he said. 

Many analysts and investors said they didn’t agree. 

“Yield curve control seems to be reaching its limits, and there is a question mark over the sustainability of the policy,” said Masahiro Ichikawa, a strategist at Sumitomo Mitsui DS Asset Management.

To enforce its cap, the central bank in January alone has bought more than ¥17 trillion, equivalent to around $131 billion, of Japanese government bonds with both short and longer maturities. That is the largest monthly purchase ever.   

While the BOJ can create unlimited yen to buy government bonds, analysts say the purchases are disrupting the government-bond market. Mr. Ichikawa said if the central bank keeps swallowing up nearly every bond in the 10-year zone, it could reduce liquidity. That would make it hard for companies issuing bonds to determine an appropriate yield since government bonds serve as a market benchmark. 

Mr. Kuroda said he didn’t think the increased bond purchases were causing problems.  

For the moment, Wednesday’s move eased the pressure on the BOJ as the 10-year yield fell as low as 0.36% after the announcement. The yield later rose back to 0.41%.

But analysts predicted the move would be temporary and market players would again start betting on a policy shift later this year.

“The BOJ chose a path to keep fighting with market pressures at least until its March meeting,” said Mizuho Securities economist Yasunari Ueno. 

Investors who believe the BOJ will raise rates can sell short Japanese government bonds—meaning they borrow the bonds, sell them, and then repurchase them later when they believe the bonds will be cheaper. Bond prices move in the opposite direction to yields, so if the BOJ lets the 10-year yield rise to, say, 1%, prices would go down and short sellers would profit.

Officially the 0.5% cap is part of a policy to keep the 10-year yield in a band around zero. MUFG Bank strategist Takahiro Sekido said he expected the BOJ to scrap the zero policy as soon as April under a new governor. 

Mr. Kuroda’s term expires in April. The next policy-setting meeting in early March is expected to be his last.

The governor said his decadelong easing program has been effective in buoying the Japanese economy. He said he expected wage growth would accelerate but he wasn’t sure how fast. The bank has described wage growth as a key to achieve its target of sustained 2% inflation. 

“I don’t think we have reached a stage where the price goal is achieved in a sustainable manner,” Mr. Kuroda said.

Inflation in Japan has neared 4% recently but the central bank projected the figure would fall below 2% in the year ending March 2024 as oil prices ease back from their highs last year.

Write to Megumi Fujikawa at [email protected]

Gov.

Haruhiko Kuroda

denied that the central bank he has led for nearly a decade was on the same road to monetary tightening traveled in 2022 by the Federal Reserve and the European Central Bank.

“I don’t think it is necessary to widen the range for the long-term yield,” Mr. Kuroda said at a news conference.  

The cap is part of a policy the BOJ calls yield curve control, which also includes a minus 0.1% short-term policy rate.

Although speculators have repeatedly pushed the 10-year yield slightly above the new cap in recent days, Mr. Kuroda said he expected market functioning to improve. He said it would take some time for yields to settle down because markets had grown accustomed to the old cap.

“Yield curve control is sufficiently sustainable,” he said. 

Many analysts and investors said they didn’t agree. 

“Yield curve control seems to be reaching its limits, and there is a question mark over the sustainability of the policy,” said Masahiro Ichikawa, a strategist at Sumitomo Mitsui DS Asset Management.

To enforce its cap, the central bank in January alone has bought more than ¥17 trillion, equivalent to around $131 billion, of Japanese government bonds with both short and longer maturities. That is the largest monthly purchase ever.   

While the BOJ can create unlimited yen to buy government bonds, analysts say the purchases are disrupting the government-bond market. Mr. Ichikawa said if the central bank keeps swallowing up nearly every bond in the 10-year zone, it could reduce liquidity. That would make it hard for companies issuing bonds to determine an appropriate yield since government bonds serve as a market benchmark. 

Mr. Kuroda said he didn’t think the increased bond purchases were causing problems.  

For the moment, Wednesday’s move eased the pressure on the BOJ as the 10-year yield fell as low as 0.36% after the announcement. The yield later rose back to 0.41%.

But analysts predicted the move would be temporary and market players would again start betting on a policy shift later this year.

“The BOJ chose a path to keep fighting with market pressures at least until its March meeting,” said Mizuho Securities economist Yasunari Ueno. 

Investors who believe the BOJ will raise rates can sell short Japanese government bonds—meaning they borrow the bonds, sell them, and then repurchase them later when they believe the bonds will be cheaper. Bond prices move in the opposite direction to yields, so if the BOJ lets the 10-year yield rise to, say, 1%, prices would go down and short sellers would profit.

Officially the 0.5% cap is part of a policy to keep the 10-year yield in a band around zero. MUFG Bank strategist Takahiro Sekido said he expected the BOJ to scrap the zero policy as soon as April under a new governor. 

Mr. Kuroda’s term expires in April. The next policy-setting meeting in early March is expected to be his last.

The governor said his decadelong easing program has been effective in buoying the Japanese economy. He said he expected wage growth would accelerate but he wasn’t sure how fast. The bank has described wage growth as a key to achieve its target of sustained 2% inflation. 

“I don’t think we have reached a stage where the price goal is achieved in a sustainable manner,” Mr. Kuroda said.

Inflation in Japan has neared 4% recently but the central bank projected the figure would fall below 2% in the year ending March 2024 as oil prices ease back from their highs last year.

Write to Megumi Fujikawa at [email protected]