The Bank of Japan will not be bullied

Ahead of the Bank of Japan’s meeting today there had been some chatter that governor Haruhiko Kuroda might bow down to market pressures and follow most other major central banks in tightening policy.

But no. The BoJ’s not for turning.

The Bank of Japan has renewed its pledge to keep bond yields at zero, sending the yen lower and widening the policy gap with other central banks that have raised interest rates to tame inflation.

The BoJ’s decision to stick to its ultra-loose monetary policy exacerbates a global divergence in yields after the Federal Reserve raised its main interest rate by 0.75 percentage points this week, prompting Switzerland and the UK to also increase rates.

The BoJ on Friday kept overnight interest rates at minus 0.1 per cent. It said it would conduct daily purchases of 10-year bonds at a yield of 0.25 per cent, showing no willingness to let bonds trade in a wider band.

The pressure to do something must have been hefty. After all, the yen has careened to a 24-year low against the dollar, and keeping the 10-year Japanese government bond yield pinned below 25 basis points has meant a wild buying spree lately.

Deutsche Bank estimates that the BoJ has spent $72bn buying bonds just this week, almost what Fed and ECB were doing in an entire month last year. Adjusted for the different sizes of their respective economies, the pace of Japanese QE this week is more than 20 times the pace of the Fed’s in 2021.

Overnight, Evercore ISI’s Krishna Guha had therefore speculated that the Bank of Japan could buckle, with potentially huge ramifications for markets.

BoJ YCC is the last anchor of the old global yield curve structure via arbitrage conditions and flows. If it breaks the ramifications would be global, putting further upward pressure on yields in the US, Europe and Asia.

Foreign investors have been dumping JGBs aggressively this week testing the BoJ’s readiness to buy in unlimited quantities to defend the 25bp cap in anticipation that it might capitulate and scrap or reset YCC on Friday.

Our best guess is that the BoJ holds the line now for reasons we discuss in this note. But this has been an extraordinary week in central banking and we do not feel that we should rule anything out.

Extraordinary week or not, it seems the BoJ maintains a diamond-hand commitment to spraying money at markets, unlike the weaklings at the Federal Reserve, ECB, Bank of England and Swiss National Bank.

The BoJ DID cautiously reference “developments in financial and foreign exchange markets”, and at the subsequent press conference Kuroda switched from talking about how a weaker yen was good to saying the sharpness of the tumble was “negative”. But policy-wise it mattered not.

Perhaps the BoJ’s stance will change if the yen weakness deepens into a real currency crash. But we’d note that the inflation dynamics are pretty different in Japan, and the BoJ has regretted taking its foot off the accelerator prematurely before.