Tuesday, 14 August, 2018

Bank of Japan Shift Propels Biggest Bond-Yield Jump in Two Years

USD Down CHF Up. Yen BoJ Under Pressure – Asia Market Open BOJ says rising female, senior workers keeping inflation low
Orlando Vargas | 02 August, 2018, 18:26

The Fed is expected to keep rates steady at the end of its meeting.

"The BOJ is now more engaged and prepared to fight a long-run battle against deflation or disinflation", said Shigeto Nagai, Head of Japan Economics at Oxford Economics.

Following a two-day policy meeting, the Japanese central bank made a decision to maintain its target level for the yield on the 10-year government bond at around zero percent, but said the yield "may move upward and downward to some extent". That's the lowest in more than a week.

Spreadbetters pointed to a dour mood elsewhere, with London's FTSE futures FFIc1 off 0.7 percent and E-Minis for the S&P 500 down 0.3 percent.

Just the chance of such a shift has sent the yen higher in the last week or so, leaving the dollar around 111.13 yen JPY= from a peak of 113.18 earlier in the month.

The dollar index, which has risen 2.6 percent for the year, was on pace to finish July down 0.2 percent, its first monthly decline since March. Japan's currency had strengthened leading into the meeting.

Yields on U.S. Treasury bonds rose, with the benchmark 10-year at a six-week high, as investors sold U.S. government bonds on growing speculation that the BOJ may adjust its ultra-loose monetary policy at its meeting.

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BoJ governor Haruhiko Kuroda has insisted the current policy is sustainable but said the Bank would study its negative impact on the market. "When you look at rates policy alone, I think they are adding to easing somewhat because they keep low rates longer than people had expected", he said.

Some observers saw Tuesday's developments as a precursor to policy normalization some time in the future.

Speculation on what the BOJ might do includes possibly adjusting its yield-curve control and exchange-traded fund (ETF) buying schemes. "As long as you believe that the BOJ is still trying to achieve 2 per cent inflation as soon as possible, the logical thinking is that this move is easing, not tightening".

"The BOJ intends to maintain current extremely low levels of short- and long-term rates for an extended period of time", taking into account uncertainties over the outlook including the effect on the economy of next year's scheduled sales tax hike, the bank said in the statement.

"They tried their best to avoid the perception of tapering or normalization by introducing the forward guidance", said Nagai. The estimate for fiscal 2019 was cut to 1.5%, from 1.8%, while fiscal 2020 was trimmed to 1.6%, from 1.8%. The introduction of forward guidance is likely to increase the predictability of further policy adjustments, Bloomberg Economics' Yuki Masujima wrote. Yet, Kuroda also indicated that the BoJ will tolerate 10-year yields deviating as much as 0.2% from zero, compared to 0.1% now. It cited factors such as rising numbers of women and seniors entering the workplace, which has weighed on wages.

The first policy change in almost two years came as the central bank expects a prolonged fight to achieve its 2 percent inflation target, with price gains remaining weak despite robust corporate profits and a tightening labor market.

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