Daily Times

Japan’s central bank tweaked its longstanding monetary easing programme on Tuesday, in a surprise move that saw the yen strengthen quickly against the dollar and prompted falls on Tokyo bourses.

The change marks a rare shift of gears for the dovish central bank, which has largely left its policy intact even as counterparts in other major economies hike rates to tackle inflation. After a two-day policy meeting, the bank said it would widen the band in which it would allow rates for 10-year Japan government bonds to move, saying it would “improve market functioning”.

“The Bank will expand the range of 10-year JGB yield fluctuations from the target level: from between around plus and minus 0.25 percentage points to between around plus and minus 0.5 percentage points,” it said in a statement. The move saw the yen strengthen rapidly against the dollar, with the greenback falling from a daily high of 137 yen to 133 yen within minutes of the decision.

The announcement came during the morning break in Tokyo trade, but the key Nikkei 225 index plunged as it reopened, falling as much as three percent before recovering slightly. Few had anticipated the shift, with all 47 of the economists surveyed by Bloomberg ahead of the decision saying they expected no change in policy.

The bank left the rest of its longstanding loose monetary programme intact, including its years-old inflation target of two percent. Governor Haruhiko Kuroda, whose term ends next spring, has for years struggled to steer the world’s third largest economy towards sustained two percent inflation, seen as necessary for growth. Prices in Japan have risen sharply this year, with the consumer price index in October at 3.6 percent, the highest in four decades.

But Kuroda and the central bank consider the increases temporary, citing a lack of strong demand and wage rises. Speaking to reporters on Tuesday afternoon, Kuroda insisted the shift “is not the first step of an exit strategy”.

“Once the price stability target draws closer, the monetary policy board will discuss strategies toward the exit and will make information public accordingly,” he said. Still, the BoJ has come under pressure to move away from its ultra-loose policy as central banks in other major economies hike interest rates to tackle inflation. The resulting differential has seen the yen nosedive about 20 percent against the dollar this year.

Hideo Kumano, chief economist at Dai-ichi Life Group, said the decision showed the bank recognised its existing policy was no longer tenable. “It has been unrealistic to try to cap the long-term yield with the fixed-rate bond-buying operations at 0.25 percent,” he told AFP. “It seems to me that the bank wanted to create a little bit of a sense of policy flexibility or room for policy choices and pass the baton to the next governor,” he added. Kuroda’s term ends in April, and over the weekend reports suggested Japan’s government could work with his successor to move away from the longstanding two-percent price target.

The bank’s decision Tuesday sent shockwaves through Asian markets, with stocks falling on regional bourses as investors digested the news.

“In reality, the long-term rate will become 0.5 percent. It will reduce the rate gap between Japan and the US,” said Kumano. But Kuroda was at pains to insist “this is not a rate hike”.

Saisuke Sakai, chief economist of Mizuho Research & Technologies, said the move would help address the weaker yen caused by the growing gulf between US and Japanese central bank policy. But “unlike rate hikes by the Fed and European central banks aimed at cooling down overheated economies… this is aimed chiefly at stabilising market function,” he told AFP. “Japan’s economy has not recovered to the pre-pandemic level yet, in contrast to the US economy,” he noted.