TOKYO – 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 stabilized.
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.
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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 <.N225> 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 program for the time being."
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 revitalize the economy.
Kuroda put up a brave face in his briefing, insisting markets will stabilize 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 scrutinizing 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.
(Additional reporting by Tetsushi Kajimoto and Kaori Kaneko; Editing by Shri Navaratnam and Neil Fullick)