Bank of Japan vows to keep tapering bond buying despite rise in yields

THE Bank of Japan (BOJ) will keep tapering its government bond purchases despite recent rises in yields, deputy governor Shinichi Uchida said on Friday (Feb 28), stressing its huge bond holdings continue to exert a strong stimulus effect on the economy.

Uchida also reiterated the central bank’s readiness to continue raising short-term interest rates if economic and price developments move in line with its projections.

“Japan’s economy is recovering moderately, albeit with some weaknesses,” Uchida told parliament, adding that underlying inflation was gradually accelerating towards the BOJ’s 2 per cent target.

The remarks follow those by governor Kazuo Ueda, who warned of “very strong” uncertainty over the global economic outlook due in part to threats of higher tariffs by US President Donald Trump.

The BOJ raised short-term interest rates to 0.5 per cent from 0.25 per cent in January, and continues to taper its huge bond buying under a plan laid out in July last year.

Japanese government bond (JGB) yields have risen recently on mounting market expectations the BOJ will raise rates again soon and may take borrowing costs higher than initially thought.

“There’s no change to our stance on short-term policy rates and government bond operations” despite the recent rise in yields, Uchida said.

“The move in yields reflects the market’s view on the economic and price outlook, as well as overseas developments,” he said, adding the BOJ’s huge bond holdings “continue to exert a strong monetary easing effect” on the economy.

When asked by an opposition lawmaker whether the BOJ’s taper plans and prospects of further rate hikes would keep pushing up bond yields, Uchida said: “That’s up to markets to decide.”

After rising on Thursday due to revived bets of a near-term rate hike, the 10-year JGB yield fell 1.5 basis points from the previous day to stand at 1.375 per cent on Friday.

A majority of economists polled by Reuters expect the BOJ to hike rates once more this year, most likely during the third quarter, to 0.75 per cent. The BOJ will next hold its policy review on Mar 18 to 19. REUTERS