June 11, 2013 / 4:06 AM / 4 years ago

UPDATE 2-BOJ stands pat, leaves door open for market calming steps

6 Min Read

* Monetary policy on hold after massive April stimulus
    * BOJ revises up view on economy, says it is picking up
    * Skips steps to help calm market nerves, bond futures fall
    * Kuroda: Will mull offering longer-term funds if needed


    By Leika Kihara and Stanley White
    TOKYO, June 11 (Reuters) - Bank of Japan Governor Haruhiko
Kuroda said the central bank will consider fresh steps to calm
markets if borrowing costs spike again in the future, but the
central bank held off on new measures on Tuesday arguing that
bond markets had stabilised.
    The decision disappointed some investors, who had factored
in new market operation measures, prompting a rebound in the yen
and falls in Tokyo shares and Japanese government bonds - moves
that counter the aims of Prime Minister Shinzo Abe's aggressive
policy mix.
    Rising bond market yields have already pushed up some
mortgage rates, raising concerns that a further rise could
increase other borrowing costs and so dent the economy's new
found momentum under Abe.
    "We remain vigilant to long-term interest rate moves. It's
undesirable for volatility to heighten, so we'll make efforts to
reduce it," Kuroda told a news conference.
    The BOJ left monetary policy unchanged, as widely expected,
thus keeping in place a pledge first made on April 4 to expand
the supply of money at an annual pace of 60 trillion ($605
billion) to 70 trillion yen in a bid to turnover years of
deflation with 2 percent inflation in two years.
    The BOJ raised its official assessment of the economy -
another reason that could explain its inaction on market-calming
measures. Data on Monday had shown economic growth was faster
than previously thought, the current account surplus was growing
rapidly and lending was on the rise. 
    "Japan's economy is picking up," the central bank said in a
statement, more upbeat than last month when it said growth was
starting to pick up. It also revised up its assessment on
exports and output to say they were picking up thanks to a
gradual recovery in global growth and the benefits of a weak
yen.
 
 
    
    The dollar slumped as low as 96.48 yen, more than 2
percent on the day, after the BOJ's announcement. The Nikkei
share average shed 1.5 percent and the benchmark 10-year
bond yield rose 3.5 basis points to 0.870 percent
. Financial markets were weak more generally as
well, which contributed to the reaction in Tokyo.
    Some central bankers had been considering the idea of
extending the maximum duration of cheap, fixed-rate funds
offered by the BOJ in market operations to two years from the
current one year.
    Such a move would have made it easier for banks that were
caught wrong-footed by last month's spike in JGB yields to hedge
their portfolios by reducing the need to sell bonds to balance
their books, thus potentially dampening market swings.
    "Today's decision may reflect Kuroda's stance of not taking
incremental action in response to day-to-day market moves," said
Hideo Kumano, chief economist at Dai-ichi Life Research
Institute in Tokyo.
    "He may also have thought there's no need to be too nervous
about the market volatility, hoping to determine more the effect
of the BOJ's bond-buying programme for the time being."
    
    MARKET TUMULT
    Before the recent market setback, euphoria over Abe's
campaign to reflate the economy had driven Japanese equities up
more than 70 percent since mid-November. The yen had briefly
tumbled to a 4-1/2-year low against the dollar of 103.74 yen,
raising the earnings prospects for exporters.
    The BOJ stunned financial markets on April 4 by setting in
motion an intense burst of monetary stimulus, promising to
double its bond holdings in two years and boost purchases of
risk assets.
    One aim of the central bank's JGB buying is to reduce
long-term interest rates, which could act as a lever to revive
consumption.
    But the massive scale of the purchases jolted markets
instead and prompted a rush of sellers. The 10-year bond yield
jumped to a one-year high of 1.000 percent on May 23 which,
coupled with jitters over slowing Chinese growth, hurt global
stocks, including Japanese equities.
    The yen also surged to a two-month high against the dollar
last week, weighing on the export-reliant economy and taking
back a chunk of the feel-good effect of "Abenomics", the name
given to Abe's economic policies, a prescription of sweeping
fiscal and monetary expansion aimed at jerking Japan out of a
two-decade long slump.
    A loss of market confidence would be a big blow to
Abenomics, which relies on sentiment to spur a virtuous circle
of consumption, investment, higher wages and lending to
revitalise the economy.
    Kuroda put up a brave face in his briefing, insisting
markets will stabilise over time to reflect Japan's economic
recovery. Gradual improvements in the jobs market will offset
some of the negative effect recent stock price falls could have
on consumer sentiment, he said.
    Kuroda also dismissed market speculation the BOJ will soon
boost purchases of risk assets, notably that of real-estate
investment trust (J-REIT), to tame market turbulence.
    "Japan's REIT market is not that big, so it's hard to
sharply increase our purchases in a short period of time,"
Kuroda said.
    Many analysts say the BOJ will spend more time scrutinising
market developments and hold off on additional monetary easing
unless the market turbulence inflicts severe harm on the
economy, given its dwindling list of policy options.
    "As long as yields move in line with economic developments,
this is not a problem. If yields start to deviate from the
underlying economy, the BOJ could make some minor adjustments in
the future," said Hiroshi Miyazaki, senior economist at
Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

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