BoJ’s Ueda: BoJ's massive stimulus had negative side-effects

Bank of Japan Governor Kazuo Ueda is back on the wires on Thursday, via Reuters, commenting on the Bank’s policy.

Key quotes

Negative rate and bother tools under BoJ's massive stimulus had boosted demand by pushing down real interest rates, but had side-effects too such as on JGB market function.

Preliminary wage negotiation outcome tends to be revised down but even so, we thought final outcome would be fairly strong number.

Consumption was showing some weakness but we were able to confirm strength in capex, when asked why boj decided to end negative rates in March not April..

We know some small firms might struggle to hike wages, but overall, small, midsized firms' profits are improving.

As we end our massive stimulus, we will likely gradually shrink our balance sheet, and at some point reduce JGB purchases.

At present, we have no clear idea on timing of reducing JGB buying, scaling back size of balance sheet.

We will take plenty of time examining how to reduce BoJ's ETF holdings.

In event of reducing BoJ's ETF etf holdings, BoJ will come up with guidelines taking into account market developments at the time

In selling BoJ's ETF holdings, we will do so in a way that minimises losses on BoJ, disruptions in markets.

There have been several proposals on ways to reduce BoJ’s ETF holdings, but won't comment on each of them.

JGB holdings will remain roughly unchanged.

Market reaction

USD/JPY is holding its rebound to near 150.50 on the above comments, having hit session lows of 150.27 so far this Thursday. The pair is still down 0.50% on the day.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

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