Bank of Japan Keeps Interest Rates Low at Kuroda’s Last Meeting

The Bank of Japan (BOJ) decided to maintain ultra-low interest rates and its controversial bond yield control policy at retiring governor Haruhiko Kuroda’s last policy meeting. While most analysts widely expected this move, it caused the yen and local bond yields to tumble as investors hoped for potential changes to the yield curve control (YCC).

Kuroda’s Mixed Legacy

Kuroda leaves the bank with a mixed legacy. On the one hand, his massive stimulus is praised for pulling Japan’s economy out of deflation. Conversely, it has strained bank profits and distorted market function through prolonged low-interest rates. As the country prepares for a leadership transition in April, deciding to hold off on making changes leaves room for options.

The BOJ’s Policy Decisions

At the two-day meeting that ended on Friday, the BOJ maintained its short-term interest rate target at -0.1% and the 10-year bond yield at around 0%. The band set around the 10-year yield target, which allows the yield to rise to 0.5%, was also left unchanged.

Senior economist Norihiro Yamaguchi noted that while widening the band to secure a smooth leadership transition was possible, Kuroda decided to avoid a sharp rise in JGB yields before the end of the fiscal year. However, the decision to uphold policy rates may come with a cost. The BOJ will be forced to continue massive JGB purchases to avoid speculation of additional YCC tweaks that could worsen market liquidity.

Market Reaction

After the no-surprises decision, the yen dropped about 0.49% against the dollar but pulled back from a knee-jerk plunge of 0.6%. Meanwhile, the benchmark 10-year JGB yield experienced a sharp decline following the BOJ’s announcement.

Related Facts

• Haruhiko Kuroda’s leadership of the BOJ began in 2013.
• The BOJ has maintained its ultra-loose monetary policy for over eight years.

Key Takeaway

The decision to maintain ultra-low interest rates and the bond yield control policy at Kuroda’s last meeting has left room for options ahead of a leadership transition in April. While the BOJ’s policy decisions were widely expected, the market reaction caused the yen and local bond yields to tumble temporarily.

Conclusion

As the Bank of Japan prepares for a new leadership transition, its decision to maintain its ultra-loose monetary policy may come with a cost. However, the BOJ remains committed to supporting the country’s economy through these trying times.