As the last major global central bank to announce interest rate policy this year, the Bank of Japan decided to surprise the market on Tuesday (20th) by announcing the expansion of the yield curve control (YCC) range. The move caught traders off guard, sending the yen stronger, Japanese shares tumbling and dragging global markets into turmoil.
At the press conference held in the afternoon, Haruhiko Kuroda, governor of the central bank, explained that the central bank’s decision today is not an interest rate hike, nor does it mean giving up yield curve control.
He emphasized, “Today’s adjustment will make the easing policy more effective. The purpose of this decision is to make the effect of yield curve control more obvious.” “Today’s action focuses on market functions and can prevent the negative economic impact of the adjustment.” “.
Kuroda said the central bank’s goal is to achieve its inflation target steadily while rising wages and make it sustainable, which will take more time. It is too early to discuss the specifics of changing the monetary policy framework or exiting accommodative policy.
Analysts at Capital Economics said there was nothing in the BOJ statement to suggest that the decision heralds a broad tightening of monetary policy. Meanwhile, the Bank of Japan’s assessment of current economic conditions and outlook for the coming quarters was little changed from its October meeting.
Although Kuroda’s statement at the press conference did not change the current tone, the Bank of Japan’s adjustment on Tuesday still sparked debate in the market.
Kuroda has been staunchly dovish for the past few months, emphasizing that any change in easing policy must continue until strong wage growth has taken place, rather than acting in response to a weakening yen. He also equated swings in the yield target with rate hikes, which is why most economists don’t see a shift in the policy.
Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official, said it surprised him today that Haruhiko Kuroda was willing to take another hit to his reputation and risk being exposed as a “bad guy” .
Regardless of how the central bank justifies the matter, it is a step toward unwinding easing and opens the door to a possible rate hike next year under a new governor, Adachi said.
Takeshi Minami, an economist at Norinchukin Research Institute, said it was inevitable that the BOJ’s surprise shift was seen by the market as part of a tightening move. He predicts that the BOJ’s goal is not just to curb market distortions, but may also want to prevent monetary policy from propping up unsound fiscal policy.
Kerry Craig, global strategist at JPMorgan Asset Management, believes that the Bank of Japan’s action today was earlier than expected, but it is a step towards Japan’s policy normalization process. However, this is only the first step, and YCC and negative interest rate strategies still exist. Suggestions that the Bank of Japan is moving away from ultra-loose policy should be positive for the yen in the short term.