The Bank of Japan pledged to adjust its unprecedented stimulus program as needed after a jump in bond yields that highlighted risks linked to policy makers’ campaign to revive the world’s third-largest economy.
BOJ Governor Haruhiko Kuroda told reporters in Tokyo that the central bank will conduct its debt purchases in a flexible manner, and that the recent volatility in government securities isn’t yet affecting the economy. He spoke after the BOJ board affirmed its plan to double the monetary base in two years as it seeks to end 15 years of entrenched deflation.
The biggest surge in government debt yields in five years threatens to undermine the BOJ’s stimulus, with companies including steelmaker JFE Holdings Inc (5411). pulling bond sales amid the tumult. The prospects of a growth rebound and the emergence of inflation has contributed to sending the rate on 10-year bonds up more than a quarter percentage point in two weeks.
“Kuroda has to put on a brave face and say that this is expected and nothing is too unusual,” said Izumi Devalier, Japan economist at HSBC Holdings Plc in Hong Kong. “If it sounds like he is wavering or the BOJ is getting scared about the impact of its bond buying program,” investors may question the central bank’s commitment to its policies, she said.
Kuroda doesn’t expect yields to “jump a lot” from here, the central bank chief said, adding that the BOJ will adjust the frequency, pace and type of bond-buying operations as needed, seeking to avoid excessive volatility. The BOJ will meet with market participants May 29 to discuss developments, it said.
The central bank stuck with an April pledge to expand the supply of money in the economy by 60 to 70 trillion yen ($683 billion) a year. The BOJ raised its assessment of the economy, saying it has ``started picking up.'' Twenty-six of 27 analysts in a Bloomberg News survey forecast no change in policy today as a sliding yen and gains in the stock market boost the outlook for growth.
Ten-year government debt yields rose to 0.885 percent as of 5:35 p.m. in Tokyo from as low as 0.86 percent before the decision. That compared with a high of 0.92 percent last week.
The yen weakened 0.5 percent to 102.97 per dollar, down about 16 percent for the year, a slide that’s bolstered the competitiveness of Japanese exporters while making the cost of imported goods such as energy more expensive. A government report today showed that exports in March posted the first back-to-back gain on an annual basis since May 2012. A jump in imports left Japan with a 10th straight monthly trade deficit.
Kuroda said at a government meeting on May 20 that it’s natural for yields to rise gradually as the outlook for the economy and prices improves, an official told reporters. In Seoul today, Bank of Korea Governor Kim Choong Soo said a U.S. exit from so-called quantitative easing could spur risks worldwide from rising yields.
Economists including Naohiko Baba, chief Japan economist at Goldman Sachs Group Inc., say the BOJ could expand easing in October, when price forecasts will indicate the degree of progress that it has made toward 2 percent inflation in two years. While Group of Seven finance chiefs indicated this month that they will tolerate a sliding yen for now, South Korean Finance Ministry official Choi Hee Nam yesterday indicated continuing concern at the currency’s weakness.
Consumer prices in Japan slid 0.5 percent in March from a year before, excluding volatile fresh-food costs, highlighting the gap the BOJ has to bridge. BOJ board members last month predicted that prices would rise 1.9 percent in the fiscal year starting in April 2015, leaving out the impact of a planned sales-tax increase, their median forecast showed.
Toyota Industries Corp. scrapped a plan to sell 20 billion yen of seven- and 10-year bonds, Nomura Securities Co., which was managing the deal, said May 15. JFE Holdings withdrew a 10-year note offering on the same day, citing market volatility, according to a person familiar with the matter.
“If abrupt moves in yields continue, that will influence companies’ ability to raise funds,” Hiromasa Yonekura, the chairman of Sumitomo Chemical Co. and head of Keidanren, Japan’s biggest business lobby, said at a press conference on May 20. The government should “contain the volatile moves” while also being clear about “its commitment to achieve fiscal health,” he said.
Yields on benchmark 10-year government securities climbed about 23 basis points in the two weeks through May 17, the biggest such advance since May 2008, according to data compiled by Bloomberg. The central bank, set to buy 70 percent of the debt sold by the government each month, stepped in on May 15 to limit the decline in prices, announcing a 2.8 trillion yen infusion of funds.
Price volatility for Japanese government bonds surged 2.6 percentage points this year to 3.65 percent yesterday, the biggest advance among 26 sovereign-debt markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.
Richard Koo, the chief economist at the Nomura Research Institute in Tokyo, said this week that that it could have been “the beginning of the end” for the Japanese economy if 10-year yields had continued climbing beyond last week’s high.
Japan’s economy grew at the fastest pace in a year last quarter as stock-market gains buoyed consumer spending. While Kuroda’s “new phase” of monetary easing supports exporters including Toyota Motor Corp. (7203) by depreciating the yen, weakness in European economies is constraining demand, data showed today. April exports rose a less-than-forecast 3.8 percent.
Around the world today, data on U.S. mortgage applications and home sales will help to show the strength of global demand after the U.K. reported falling retail sales in April.
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