BOJ Governor Ueda: "Interest Rates Will Be Left to the Market... Speed of Increase Will Be Controlled"

Long-term interest rates exceed 0.5% but tolerated in Yongin
Concerns over sharp rate hikes lead to modification instead of abolition
Bond purchases to be executed if rates exceed 1%
"Decision made to maintain financial easing"

Kazuo Ueda, Governor of the Bank of Japan (BOJ), stated on the 28th that "the Yield Curve Control (YCC) policy has been revised to continuously maintain the monetary easing policy" and that "long-term interest rates will be allowed to be formed by the market." However, he emphasized that the BOJ will intervene and adjust the pace if interest rates rise to a certain level to prevent speculative selling of bonds.

On the 28th, after the monetary policy meeting, Governor Ueda said, "Strictly suppressing long-term interest rates at 0.5% could have adverse effects on the bond market."

Kazuo Ueda, Governor of the Bank of Japan.

After the monetary policy meeting on the same day, the BOJ announced its policy to tolerate some extent of deviation beyond the allowable fluctuation range of 0.5% for the 10-year government bond yield depending on market conditions. Since 2016, the BOJ has set a target for the 10-year government bond yield, an indicator of long-term interest rates, and if it exceeds this target, the BOJ has been purchasing government bonds without limit to prevent interest rates from rising further under the YCC policy. The purpose is to supply liquidity to the market and stimulate the economy. Since December last year, the allowable fluctuation range has been raised from ±0.25% to ±0.5%.

The BOJ plans to maintain this allowable fluctuation range as it is. However, whereas previously the BOJ would immediately purchase government bonds to lower interest rates once they exceeded 0.5%, it will now tolerate interest rate fluctuations depending on market conditions until rates exceed 1%. The market interpreted this policy as effectively expanding the upper limit of long-term interest rate fluctuations to 1%.

Regarding setting 1% as the threshold for bond purchases, Governor Ueda explained, "It is a cautious upper limit." He expressed concern that a sudden revision of the YCC policy could cause market confusion. According to Nihon Keizai, major banks reportedly expressed caution to the BOJ earlier this month during consultations, warning that abolishing the YCC policy could result in a sharp rise in interest rates.

When asked by reporters whether the BOJ intends to operate the YCC policy flexibly and leave interest rates to the market, he basically answered "Yes." However, he emphasized that to prevent speculative bond selling in the market, "the pace of interest rate increases will be controlled through open market operations (fixed-rate operations)." This is to prevent investors from engaging in bond sell-offs as bond prices fall due to rising bond yields. Fixed-rate operations refer to the BOJ designating a specific interest rate and purchasing government bonds without limit. This differs from general government bond purchase operations, which do not designate an interest rate and buy bonds in order of the highest yields.

He also hinted that the policy revision was made with inflation in mind. Japan's consumer price index (CPI) inflation rate for June was 3.3%, marking the fifth consecutive month above 3%, surpassing the BOJ's inflation target of 2%. The BOJ appears concerned that if the current inflation trend continues, investors betting on a shift to tightening may engage in bond speculation. Nihon Keizai explained, "In a situation where inflation is prolonged, the BOJ likely judged that it is necessary to operate the YCC policy flexibly to maintain the easing policy."

However, Governor Ueda drew a line on the idea of lifting the negative (-) interest rate, saying, "It is still quite far off." Although inflation is on an upward curve, it could be a temporary phenomenon, so it is difficult to assume that inflation has stably reached the 2% range.

The BOJ decided to keep the policy rate, the deposit rate, at -0.1%. It also plans to continue purchasing index-linked exchange-traded funds (ETFs) to increase the money supply in the market.

This content was produced with the assistance of AI translation services.