Breaking: BOJ expands JGB yield target band, drops ETF buying target, USD/JPY jumps

The Bank of Japan (BOJ) kept its key policy rate unadjusted at the conclusion of its two-day March monetary policy review meeting on Friday.

The central bank left the key rate steady at -10bps while maintaining its pledge to buy J-REITS at an annual pace of up to JPY180 bln.

The BOJ clarified in a policy statement that the 10-year JGB yield may move up or down 0.25% (not 0.2%) around its 0% target.

The central bank altered the ETF buying limits - removing the lower ceiling of 6 trillion yen ($55 billion) while keeping n upper limit of 12 trillion yen. 

Markets expected the Japanese central bank to allow the longer-term bond yields to fluctuate more around its target while hinting at a "stealth" tapering of its huge purchases of exchange-traded funds (ETF).

Statement summary

BOJ tweaks guidance on long-term interest rate target.

Will establish interest scheme to promote lending.

In scheme, interest rates, which will be linked to short-term policy rate, will be applied to certain amount of financial institutions' current account balances.

Will introduce fixed-rate purchase operations for consecutive days as powerful tool to set upper limit to rates when necessary.

Will maintain 12 trln yen ceiling for ETF, 180 billion yen ceiling for REIT even after pandemic subsides.

Makes no changes to its interest rate forward guidance.

Appropriate to maintain YCC and QQE to achieve 2% inflation.

Effective to buy ETF, REIT massively when markets destabilise hugely.

Will maintain its overshooting commitment on base money expansion.

Cutting rates is important option as nimble, additional easing measure.

Will introduce scheme that mitigates impact on financial institutions' profits at time of rate cuts depending on amount of their lending.

Will apply certain interest rates as incentive to financial institutions' current account balances.

Makes tweaks to tiered deposit reserve system.

Will modify method to calculate macro add-on balances under complementary deposit facility.

Clarifies long-term rates can move 0.25% up and down from its long-term rate target, but won't apply this rule rigidly when rates briefly undershoot in day-to-day movements.

Excessive falls in super-long yields may hurt economic activity long-term.

Market reaction 

The yen witnessed sell the fact trading after the BOJ altered the yield and ETF target, as it was already priced by the markets.

USD/JPY jumped off lows and briefly regained the 109 level on the BOJ announcement, modestly flat on the day.