The Bank of Japan made explicit that it would not follow the world’s other main central banks in rolling back crisis-era stimulus policies on Tuesday, declaring it would continue “extremely low” interest rates for a protracted duration. After being forced three times in a week to intervene to cap bond yields amid expectations, policymakers would signal a readiness to tighten its easy money regime, the central bank instead declared it was stepping up the plan for “continuous powerful monetary easing”.
Reinforcing its pledge to its programme, the BoJ introduced a forward guidance for policy rates for the first time, revealing that the extremely low levels would remain “for an extended period”.
Having been on edge in the days leading up to Tuesday’s announcement, bond markets rallied in early trading in London, with the yield on Japan’s benchmark 10-year bond falling 5 basis points to 0.04 percent, the 10-year Treasury yield declining 4bp to 2.93 percent and the German Bund easing 3bp to 0.41 percent.
The reforms announced involved attempts to make the BoJ’s huge stimulus programme more flexible. The bank repeated its pledge to continue to purchase bonds so that 10-year JGB yields remained “at around zero percent”, nevertheless it added the line that “the yields may move upward and downward to some extent”.
Analysts have warned that the BoJ’s vast monetary stimulus programme might not be viable over the long-term. The extent of the BoJ’s balance sheet, as a percentage of GDP, is 98 percent, compared with the US, which is just over 20 percent.