Bank of Japan Delays Concrete Bond-Buying Cut to July, Disappointing Markets

The Bank of Japan (BOJ) decided to reduce the scale of its government bond purchases at the Monetary Policy Meeting held on the 14th, but postponed the specific plan to the July meeting. As a result, the market is reacting that the BOJ's policy "fell short of expectations." As the US interest rate cut is delayed, the interest rate difference between Japan and the US is not narrowing, and the BOJ is buying time by gradually disclosing its policy and taking a stance to suppress the yen's depreciation.

At a press conference after the decision meeting on the 14th, Governor Kazuo Ueda said, "The recent yen depreciation is a factor in rising prices, and we are closely monitoring the policy operating environment." He also mentioned that "we need to be aware that the impact of exchange rate fluctuations on prices is increasing compared to the past." Even after deciding to lift the 'emergency monetary easing' at the March meeting, the yen continued to depreciate as he emphasized that "the easing situation will continue for the time being." Following the April meeting, Governor Ueda's remarks were interpreted as condoning the yen's depreciation, leading to a sharp drop in the yen's value to 160 yen per dollar. This was a major factor that prompted the Ministry of Finance and the BOJ to intervene in the foreign exchange market for a total of 9.7885 trillion yen.

Since meeting with Prime Minister Fumio Kishida at the Kantei (Prime Minister's Office) on May 7th, Governor Ueda has revised his statement to "closely monitoring the yen's depreciation." The market had expected that the BOJ would finalize a plan to reduce government bond purchases at this meeting and raise interest rates at the July meeting. Governor Ueda explained that the reason for postponing the plan to reduce government bond purchases was that he "wanted to carefully make a decision after listening to market opinions." However, Nobuhiro Kimura, an economist at Nomura Research Institute, speculated that "it was because all the factors are in place and there is a risk of the yen depreciating further."

The Federal Reserve (FRB) maintained its policy interest rate at the Federal Open Market Committee (FOMC) meeting on the 12th and revised its forecast for the number of interest rate cuts this year from three to one. It appears that the yen's depreciation trend will be difficult to reverse unless the US lowers interest rates. Kimura said, "The BOJ likely wanted to maximize the yen-depreciation suppressing effect until the US lowers interest rates."

Among the cards the BOJ holds, raising interest rates is the most effective in mitigating the yen's depreciation. However, raising interest rates also has a negative impact on the economy, such as increasing mortgage interest rates and corporate funding. The revised real GDP (seasonally adjusted) for the January-March quarter showed a 1.8% annualized decline. For the April-June quarter, there are negative factors such as production halts due to Toyota Motor's fraudulent certification of emissions, and it is difficult to say that the current economy is strong. A former BOJ official said, "If we can't raise interest rates and are asked to respond to the yen's depreciation, we're at a dead end. We will have to accept raising interest rates sometime."

The key is when to make that decision. Governor Ueda has indicated that he will consider further interest rate hikes if a virtuous cycle of wages and prices is confirmed, and also mentioned at the press conference on the 14th that raising interest rates in July is "certainly possible." However, not many people take this literally. Among market participants, the dominant view is that "it is difficult to simultaneously reduce government bond purchases and raise interest rates," and that interest rate hikes will be delayed until September or later.

Meanwhile, opinions among experts differ on the impact of the BOJ's reduction in government bond purchases on the market. Some experts predict that a reduction in the scale of government bond purchases could lead to a rise in long-term interest rates, while others analyze that the impact of the BOJ's policy on the market will be limited. It is necessary to continue monitoring the BOJ's future policy direction and market reactions.