Bank of Japan surprises markets with policy adjustment

The Bank of Japan said on Tuesday it would adjust its bond-buying policy and increase asset purchases – a surprise move as Japan faces economic pressure from rising inflation and a weak yen.

The change was seen as a sign that Japan could relax its adherence to ultra-low interest rates. This commitment has made the country a global outlier as other central banks around the world have pushed up interest rates in an effort to fight inflation.

In a policy statement, the Bank of Japan said it would allow the yield on its 10-year bond to move within a range of plus-or-minus 0.5 percent, widening the band from 0.25 percent, as it seeks to promote trading in domestic bonds, which has stagnated. At the same time, the bank will increase its monthly bond purchases to $67 billion from about $55 billion, the statement said.

The action shocked experts. Analysts had predicted that Japan’s famously inflexible central bank would stick with its current monetary settings through at least the spring, when the bank’s current governor, Haruhiko Kuroda, will step down.

“The consensus was completely that the BOJ would stand pat,” said Stefan Angrick, senior economist at Moody’s Analytics.

In its statement, the bank said it had made the change in light of deteriorating bond market conditions, caused in part by “volatility in overseas financial and capital markets.”

For years, the Bank of Japan has limited interest rates to a tight range to keep interest rates low. But the restrictive framework maintained with huge buying operations brought trading in some government bonds to a near standstill.

The bank said the policy change would help support an ultra-loose monetary policy that has provided households and businesses with a steady flow of cheap money for years. One of the pillars of that policy — near-zero interest rates — will remain unchanged, the bank said in its statement.

In a news briefing after the statement’s release, Mr Kuroda said it was “premature to consider revising or abandoning” his current easing policy.

Japan, the world’s third-largest economy, has felt the sting of skyrocketing food and energy prices due to the supply chain snarl and the war in Ukraine. Although inflation was much lower than in other parts of the world, it stood at 3.6 percent in October, putting a significant burden on households getting used to decades of price stability and wage stagnation.

Making matters worse is a weak Japanese yen. Earlier this year, the currency traded at a multi-decade low against the dollar, putting even more price pressure on the economy, which is heavily dependent on imports.

The yen’s weakness has been exacerbated by the Bank of Japan’s insistence on sticking to ultra-low interest rates, even as other central banks around the world have raised their own in a bid to tame runaway inflation. The gap has devalued the yen as investors move money out of Japan in search of higher returns.

The currency has regained lost ground in recent weeks as other central banks have slowed their interest rate hikes. It surged in value after Tuesday’s announcement, rising more than 3 percent. An increase in the value of the currency can help reduce inflationary pressures on the economy.

Mr. Kuroda has said he will hold on to the bank’s current interest rate policy until the bank achieves sustainable, demand-driven inflation of 2 percent, a level policymakers argue would create a virtuous cycle of growing corporate profits and wages. While current levels have exceeded this target, the bank argues that the price increases are largely driven by supply constraints, not the increased demand it aims to create.

In its statement, the bank said it would maintain its current inflation target until it could be sustained in a “stable manner”, adding that it “would not hesitate to take further easing if necessary.”

Hisako Uenocontributed with reporting.