Bank of Japan’s Stand Pat Decision Fuels Further Yen Jitters

(Bloomberg) -- The Bank of Japan held interest rates steady and simplified its language on bond-buying and policy, an outcome that pushed the yen down to a fresh 34-year low and stirred up market jitters.

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The BOJ Friday kept the range for its benchmark rate between 0% and 0.1% as widely expected by economists at the conclusion of its meeting, according to a pared-back statement with only a few lines. The central bank didn’t signal a reduction of its bond purchases, saying instead it would buy them in line with its March decision.

Despite higher inflation forecasts and a reiteration of the central bank’s resolve to raise interest rates if the projections materialize, the yen broke quickly through the 156 mark against the dollar prompting warnings from Finance Minister Shunichi Suzuki.

The currency’s weakening momentum appeared to be picking up speed as Governor Kazuo Ueda played down the impact of the weak yen on fueling inflation. Around 5 p.m. that movement abruptly reversed course, with the yen strengthening sharply from around 156.70 to 154.99 in a move reminiscent of what happened in September 2022, when a slide by the yen during a post-decision BOJ briefing was halted by intervention.

Market participants said Friday’s movements didn’t look like actual intervention, however.

“I don’t think it’s intervention, it’s not good if it is,” said Marito Ueda, head of the market research department at SBI Liquidity Market. “They wouldn’t act unless they could move the market by 4 to 5 yen.”

The jittery currency movements underscored growing nervousness as Japan’s currency continues to fall through new 34-year lows. The trend had some BOJ watchers predicting the central bank governor would try to support the currency.

“The BOJ did nothing at all to stop the weak yen today,” said Masaaki Kanno, chief economist at Sony Financial Group and a former BOJ official. “Any intervention by the finance ministry would be more effective if the BOJ suggests its concerns over the yen. But Ueda basically left the ministry alone to deal with the yen.”

Ueda faces a dilemma as he plots his policy course. The central bank chief has indicated he’d like to proceed gradually with rate increases after last month ending the negative rate policy with the bank’s first hike since 2007.

At the same time he doesn’t want to put too much pressure on a stuttering economy estimated to have shrunk in the first quarter. But the slower he goes, the longer the yen stays vulnerable to further weakness given the Federal Reserve’s reluctance to lower US rates.

The Fed’s preferred measure of inflation comes out later Friday and may serve as another catalyst that further weakens the yen and increases the risk that Japan will step into markets to prop it up. The US central bank decides on policy next week, another key event that will feed into the exchange rate.

“Now the BOJ meeting is over, the finance ministry can step in the market anytime, but they may choose to wait until US economic data are out and the Federal Reserve decision is done,” said Takeshi Minami at Norinchukin Research after the decision

In addition to the ramped up warnings of Japan’s foreign exchange officials, business leaders have amplified their concerns, implicitly putting pressure on the BOJ not to further fuel losses in a currency that’s already the biggest loser among major currencies this year.

Ueda insisted that the yen continued to benefit the economy by boosting demand and that its impact on the underlying inflation trend could still be ignored.

A key focus of this meeting was the BOJ’s stance on bond purchases and whether it would signal a reduction in purchases, partly in an effort to support the yen. But if market players were looking for a clear indication that bond purchases would be pared back, as suggested by local media reports, they didn’t get one in the statement.

The BOJ dropped a ¥6 trillion ($38.3 billion) monthly figure from the statement and a line suggesting it would continue to buy a broadly similar amount, but added that its stance largely matched its position in March.

‘Unclear’ Policy

The simplified statement makes it “very unclear” what the BOJ will do in the future with its bond buying, said Shoki Omori, chief desk strategist at Mizuho Securities Co.

“By saying the BOJ will buy JGBs in line with its March decision, the authority has the flexibility to cut purchases in its quarterly operation plan although it’s unlikely to do so for the May plan,” Omori said. The takeaway is that the yen will continue to weaken in May, Omori added.

At the briefing, Ueda said the bank did eventually want to pare its bond purchases, but said he couldn’t be specific about the timing.

The central bank also said it expected financial conditions to remain easy for the time being, a key phrase suggesting no looming rate hike. Economists surveyed before the decision saw October as the most likely month for the BOJ’s next rate hike, though a majority also flagged a risk that the bank could move earlier in July.

Looking ahead, the bank forecast inflation to remain above or around its inflation target through fiscal 2026, with inflation of 2.8% this fiscal year. It underscored the point that it is on track to raise rates again by saying it will adjust its policy settings if its projections are realized.

The median projection for fiscal 2026 was 1.9%. That shows the nine-member board expects the period in which the price measure stayed above or around its 2% goal will stretch to five years.

Still, with July flagged as the risk scenario rather than the main scenario by economists, the yen looks set to remain under pressure unless dynamics in the US economy change.

“Intervention could happen anytime but whether it can have a lasting impact is in question,” said Kanno. “Intervention could just end up giving traders an opportunity to buy the yen before selling it after the Fed meeting next week given that it’s unlikely to give any dovish signals.”

--With assistance from Yoshiaki Nohara, Erica Yokoyama, Brian Fowler and Masaki Kondo.

(Adds comment from Ueda’s press briefing)

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