The Bank of Japan (BOJ) kept its monetary stance unchanged as expected on Tuesday, leaving the market awash with liquidity as long-term interest rates rise on speculation that strong economic growth could spell a quicker end to easy money. The decision by the nine-member board to maintain its super-loose stance was unanimous, the BOJ said. Japanese bond yields have risen to some of their highest levels in over three years recently on the strength of the economy and easing deflation, threatening to damage the recovery by discouraging investment and exacerbating debt burdens. Policymakers have so far shown little alarm over rising bond yields, although they attempted to allay concerns on Tuesday.
"It's natural for rates to rise as an economy recovers, but it is also possible for rates to rise rapidly as expectations mount, and that would be problematic for the economy," Finance Minister Sadakazu Tanigaki told a news conference. Such comments soothed the bond market, with the yield on the benchmark 10-year JGBs easing to 1.795 percent <0#JPTSY=JBTC> on Tuesday after hitting a three-year high of 1.855 percent the previous day. Markets will be closely watching for comments by BOJ Governor Toshihiko Fukui, who will hold a news conference later on Tuesday. They expect Fukui to reinforce the BOJ's commitment to its current stance of flooding the markets with liquidity to keep short-term interest rates near zero.
KEEP EASY POLICY
Government officials on Tuesday also urged the central bank to keep its super-easy policy. Senior Vice Finance Minister Yuji Yamamoto, after attending Tuesday's BOJ meeting as the Finance Ministry's representative, said the government had asked the central bank to keep up its current efforts against deflation. "We asked the BOJ to continue doing what they're doing now," he told reporters. The BOJ has pledged to maintain the current "quantitative easing" policy framework until year-on-year changes in core consumer prices stabilise above zero. But with the economy growing at nearly its fastest pace in 13 years and consumer prices hovering near zero, albeit boosted by some one-off factors such as tax increases, markets have begun factoring in an end to the BOJ's current easing stance. Fukui will likely attempt to ward off such speculation. Fukui has previously emphasised that the road to ending the current policy would still take some time, saying that the "last one mile" to eradicating deflation would be a difficult one. He has also said that a new monetary policy framework would be necessary once the current target was achieved, but that it was still too early to announce such a framework. At the policy-setting meeting that ended Tuesday, the BOJ said it would continue to keep its target volume of current account deposits parked at the BOJ at 30-35 trillion yen ($270.5-$315.6 billion). ($1=110.88 yen)///www.reuetrs.com