The Bank of Japan (BOJ) kept its key policy rate unchanged at the close of its two-day monetary policy review meeting on Friday in March.
The central bank left policy rates steady at -10 bps, but maintained its promise to buy J-REITS at an annual rate of up to JPY 180 billion.
BOJ clarified in a policy statement that the 10-year JGB return could rise or fall 0.25% (not 0.2%) around the 0% target.
Markets expected the Bank of Japan to fluctuate long-term bond yields more around its target, hinting at a “stealth” run-off of its massive exchange-traded fund (ETF) purchases.
Statement summary
BOJ is adjusting the guidelines for the long-term interest rate target.
Will institute an interest rate plan to encourage lending.
In the scheme, interest rates, which will be linked to the short-term policy rate, will be applied to a specified amount of the current account balances of financial institutions.
Introduces flat-rate purchasing operations for consecutive days as a powerful tool for setting rate caps when needed.
Will maintain the 12 trln yen ceiling for ETF and the 180 billion yen ceiling for REIT even after the pandemic abates.
Does not make changes to its forward rate advice.
Appropriate to maintain YCC and QQE to achieve 2% inflation.
Effective to mass buy ETF and REIT when markets are massively destabilizing.
Will maintain overselling pledge on base money expansion.
Cutting speeds are an important option as an agile, additional easing measure.
Will introduce a scheme that mitigates the impact on the profits of financial institutions at the time of interest rate cuts, depending on the amount of their lending.
Will apply certain interest rates to incentivize the current account balances of financial institutions.
Makes adjustments to the tiered deposit reserve system.
Will change the method to calculate macro add-on balances under the additional deposit facility.
Clarifies that long-term interest rates can move up and down 0.25% from the long-term interest rate target, but this rule will not apply this rule rigidly when interest rates are briefly lower in daily movements.
Excessive drops in super long returns can hurt long-term economic activity.
Market reaction
The yen witness sold the fact that it was trading after the BOJ changed yields and ETF target as it had already been priced by the markets.
USD / JPY jumped from lows, briefly hitting the 109 level on the BOJ announcement, a modest flat on the day.