USD/JPY Fundamental Daily Forecast – BOJ Tweaks Ultra-Easy Policy in Effort to Fire Up Inflation

The Bank of Japan (BOJ) made a raft of measures on Friday, designed to make its ultra-easy policy more sustainable amid a prolonged battle to fire up inflation. The biggest of which was the BOJs decision to widen the band at which it allows long-term interest rates to move around its target.

Operational Tweaks to Yield Curve Control

As widely expected, the BOJ kept intact its target of -0.1% for short-term rates and 0% for the 10-year bond yield under its yield curve control policy. But it clarified that long-term yields can move up and down 0.25% around the target, slightly more than the implicit 0.2% level that market had seen as the BOJs line in the sand.

The general consensus is that the move is designed to allow yields to fluctuate more and breathe life back into a market made dormant by the BOJ‘s dominance. But the BOJ stressed the priority was to keep yields ’stably low as the economy feels the damage from COVID-19.

The BOJ won‘t try to prevent yields from falling below the band too rigidly. But it will act forcefully to prevent sharp rises in yields with a new weapon – a ’special operation under which it will buy unlimited amounts of bonds for consecutive days at a set price.

The BOJ removed guidance to buy exchange-traded funds (ETF) at an annual pace of roughly 6 trillion yen to make its purchase more “flexible and nimble.”

Instead of buying at a set pace, the BOJ will buy ETFs only when markets destabilize under a 12 trillion-yen ceiling it set when COVID-19 jolted stock prices in March last year.

The BOJ staff will immediately report to the board whenever they buy ETFs to ensure there is governance on how the purchases are made. The rule suggests the BOJ wont step into the market so frequently some analysts say.

The BOJ said it will keep purchases of ETFs to only those linked to the broader Topix, removing Nikkei-linked ETFs from the programme.

The BOJ also took out guidance to buy real-estate trust funds (REITS) by 90 billion Yen per year, saying it will only buy when markets destabilize under a ceiling of 180 billion Yen.