BOJ Keeps Low Rates as Kuroda Sticks to Script at Swan Song Meeting

The Bank of Japan’s (BOJ) decision to maintain ultra-low interest rates and leave the bond yield control policy unchanged was widely expected by analysts. However, some investors had bet that retiring central bank governor Haruhiko Kuroda would tweak the yield curve control (YCC) at his last policy meeting. This caused the yen and bond yields to drop as investors unwound their bets.

During his decade-long tenure, Kuroda’s massive stimulus package helped pull the economy out of deflation but has also strained bank profits and distorted market function with prolonged low-interest rates. As a result, the country’s economic growth has remained weak, and Kuroda leaves behind a mixed legacy.

The BOJ maintained its short-term interest rate target at -0.1% and the 10-year bond yield at around 0% while leaving a band set around the 10-year yield target that allows the yield to vary up to 0.5%. However, many market players have been testing the upper end of that cap, causing some to suggest that the BOJ will need to change course soon.

Related Facts

• A majority of economists polled by Reuters think that the BOJ will end the yield control policy this year, with half saying Kazuo Ueda, Kuroda’s successor, will carry out tweaks to the policy within three months.
• The yen fell to around 136.66 per dollar after a knee-jerk reaction following the policy meeting decision.
• Despite Kuroda’s defense of his stimulus program, some investors and economists have criticized the prolonged low-interest rates for diminishing the effectiveness of the policy.

Key Takeaway

The decision by the BOJ to hold interest rates steady and maintain its bond yield control policy was widely expected. Although some investors unwound bets that Kuroda would make last-minute changes, the market is still testing the upper limit of the yield control margin. As a result, the BOJ’s decision is expected to stay the same for now, but Kazuo Ueda, Kuroda’s successor, may change the policy within three months of taking over.

Conclusion

The BOJ’s decision has split opinions in the market. While some investors and economists have praised the stimulus package for helping the country emerge from deflation, others have criticized Kuroda’s prolonged low-interest rates for distorting market function and diminishing the effectiveness of the policy. With the market still testing the upper limit of the yield control margin, investors will look to Ueda to change the policy to help improve the market function.