U.S. markets closed

USD/JPY Fundamental Daily Forecast – BOJ Aligns With Other Central Banks; Pledges Unlimited Bond Buying

James Hyerczyk

The Bank of Japan (BOJ) on April 27 ramped up risky asset purchases and pledged to buy unlimited amounts of government bonds to combat the economic fallout from the coronavirus epidemic, Reuters reported.

At the rate review, the central bank pledged to accelerate purchases of corporate bonds and commercial paper until the combined balance of its holdings reaches 20 trillion yen ($186 billion).

It also pledged to aggressively buy government bonds to keep the yield curve low in a stable manner.

In a widely expected move, the BOJ maintained its short-term interest rate target at -0.1% and a pledge to guide 10-year government bond yields around 0%.

“The BOJ will purchase necessary amounts of government bonds without setting an upper limit” to keep long-term interest rates around its 0 percent target, the statement said.

The move puts the BOJ in line with other major central banks that have unleashed unprecedented amounts of monetary support as the health crisis stocks fears of a deep global recession.

The central bank also sharply cut its economic forecast and projected inflation would fall well short of its 2 percent target for three more years, suggesting its near-term focus will be to battle the crisis.

“The spread of the coronavirus at home and abroad is inflicting a severe impact on Japan’s economy,” BOJ Governor Haruhiko Kuroda told a news conference after the policy meeting in Tokyo.

“The achievement of the BOJ’s 2 percent inflation target…will take time. The outlook for prices is highly uncertain,” he added.

Trader Reaction to the BOJ Statement

“For the BOJ, the removal of the bond-buying target is like killing two birds with one stone,” as it can ramp up bond buying now and whittle it down later if it wants to end ultraloose policy, said Toru Suehiro, senior market economist at Mizuho Securities.

“With today’s move, the BOJ can stand pat on monetary policy for the time being void of a disruptive market move,” he said.

“Today’s decision would enhance the effect of policy mix,” between the government and the central bank, Economy Minister Yasutoshi Nishimura told reporters after attending the BOJ’s meeting.

Some Economists See BOJ’s Limited Policy Firepower

Some economists saw the ditching of the largely symbolic guideline as a further sign of the BOJ’s limited policy firepower beyond its assistance to help corporate financing.

“The BOJ strengthened its policy in line with expectations, but it failed to go beyond expectations. That shows the BOJ has been running out of ammunition, and it’s getting harder for the BOJ to create fresh measures,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute and a former Bank of Japan official.

This article was originally posted on FX Empire