MNI BOJ WATCH: Cuts To Bond Buys Detailed In July, Hike Eyed

The Bank of Japan could both announce a detailed plan for a reduction in its purchases of government bonds and raise its overnight rate at its next meeting in July, but any move will depend on economic and market conditions at the time, Governor Kazuo Ueda said on Friday.

“Price developments are largely in line with our forecast [made in April] but we will decide on the policy rate in July after confirming how prices evolve,” Ueda told reporters after the BOJ’s June meeting, adding that decisions will be taken on a meeting-by-meeting basis with a view to achieving the 2% inflation target.

But more significant upside risks to prices, partly from yen weakness, are likely to permit the BOJ to adjust the degree of easy policy, he added, without elaborating further. (See MNI POLICY: Weak Yen Boosts Probability Of July BOJ Rate Hike)

Earlier in the day, the BOJ decided to keep its policy interest rate in a range of zero percent to 0.1%. The board also voted by 8-1 to collect views from market participants with a view to deciding at its next policy meeting on a detailed plan for the reduction of its bond purchases during the next one to two years or so.

MARKET-DRIVEN PRICING

When asked whether purchases would fall far below the current JPY6 trillion a month, Ueda said only that the scale of reduction would be appropriate as the BOJ seeks to make bond pricing more market-driven. The reduction will not cause quantitative tightening, and stock effects from the BOJ's huge JGB holdings are likely to continue, even if the balance is reduced, he said.

“The BOJ needs to ensure the flexibility of long-term rates and also increase the predictability of market players with regard to the outlook for future JGB reduction,” he said. (See MNI POLICY: BOJ Mulls Cut In Bond Buys As Early As Next Week)

Asked about the rise in 10-year yields above 1%, Ueda said long-term rates are still accommodative in real terms, given the rise in long-term inflation expectations.