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- Breaking: Bank of Japan keeps interest rate and YCC policy steady in July
Breaking: Bank of Japan keeps interest rate and YCC policy steady in July
At the highly-anticipated July policy review meeting, the Bank of Japan (BoJ) board members decided to leave their current monetary policy settings unchanged, maintaining rates and 10yr JGB yield target at -10bps and 0.00% respectively.
Summary of the statement
BoJ maintains band around 10-year JGB yield target at up and down 0.5% each.
BoJ makes decision on ycc by 8-1 vote.
BoJ board member Nakamura dissents to decision on YCC.
BoJ board member Nakamura dissents to decision on YCC, considering it was desirable to allow greater flexibility after confirming rise in firms' earnings power from sources such as financial statements statistics.
BoJ board member Nakamura dissents to decision on ycc but in favour of idea of conducting ycc with greater flexibility.
Will guide yield curve control more flexibly.
Appropriate to heighten sustainability of monetary easing.
Will operate yield curve control more flexibly to respond nimbly to upside, downside risks.
Will keep offering fixed-rate operations for 10-year JGB yield at 1.0%.
In order to encourage formation of yield curve that is consistent guideline, boj will continue with large-scale jgb buying and make nimble responses for each maturity.
For exmaple, by increasing amount of jgb buying and conducting fixed-rate purchase ops and funds-supplying ops against pooled collateral.
Market reaction
USD/JPY’s renewed upside gained extra traction on the BoJ’s policy announcements. The pair is currently trading at 140.06, up 0.45% on the day, having tested 140.80 in a knee-jerk reaction to the BoJ decision.
Central banks FAQs
What does a central bank do?
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
What does a central bank do when inflation undershoots or overshoots its projected target?
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
Who decides on monetary policy and interest rates?
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Is there a president or head of a central bank?
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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