The Bank of Japan (BOJ) maintained its key policy rate unadjusted at the end of its two-day monetary policy review meeting on Friday.
The central bank left the key rate constant at -10bps, while maintaining its commitment to buy J-REITS at an annual rate of up to JPY 180 billion.
The BOJ said in a policy statement that the 10-year JGB yield may increase or decrease by 0.25% (not 0.2%) to around 0%.
Markets expected the Japanese central bank to allow long-term bond yields to fluctuate more around its target, while suggesting a “stealth” reduction in its huge acquisitions of exchange-traded funds (ETFs).
Summary of the statement
The BOJ is improving its long-term interest rate guidance.
It will establish an interest rate system to promote loans.
In the scheme, interest rates, which will be correlated with the short-term policy rate, will be applied to certain amounts of the current account balances of financial institutions.
It will introduce fixed rate buying operations for consecutive days as a powerful tool to set the upper limit of tariffs when necessary.
The 12 trillion yen ceiling for the ETF, the 180 billion yen ceiling for the REIT will be maintained even after the pandemic subsides.
It does not change its forward interest rate orientation.
It is appropriate to maintain YCC and QQE to achieve 2% inflation.
Effective to buy ETF, massive REIT when markets destabilize enormously.
It will maintain its commitment to exceeding the expansion of basic money.
Reducing rates is an important option as a quick and easy measure.
It will introduce a system that mitigates the impact on the profits of financial institutions when reducing the rate, depending on the value of their loans.
Certain interest rates will be applied as an incentive to the current account balances of financial institutions.
Makes changes to the multi-level deposit reserve system.
The method for calculating additional macro balances under the complementary deposit facility will be changed.
It clarifies that long-term rates may move 0.25% up and down from its long-term target, but will not rigidly apply this rule when rates are briefly in excess of daily movements.
Excessive declines in super-long yields can affect long-term economic activity.
Market reaction
The yen witnessed the sale of trading after the BOJ changed the yield and target of the ETF, as it was already at market prices.
USD / JPY fell from the low and briefly regained the 109 level in the BOJ announcement, modestly flat that day.