BOJ Maintains Policy Rate, Will Reduce Bond Buying

By Megumi Fujikawa

TOKYO--The Bank of Japan left its policy interest rate unchanged Friday but decided to reduce government bond purchases, signaling the possible beginning of quantitative tightening.

The Japanese central bank maintained its target for the overnight call rate at a range of 0% to 0.1%, the level where it has stood since the bank ended the world's last negative-interest-rate policy in March.

In a decision seen as a step toward monetary tightening, the bank said it will reduce the amount of its monthly government bond purchases. It didn't provide a new target, saying it will decide on a detailed plan for bond purchases over the next one to two years at the next monetary-policy meeting in July after discussions with market players.

When the bank dropped its policy of controlling Japanese government bond yields in March, it had said it would continue buying JGBs worth around 6 trillion yen, equivalent to $38 billion, every month to maintain easy monetary conditions.

Recently, around Y6 trillion of JGBs on average have been maturing monthly on the central bank's balance sheet. Under the new policy, the bank's JGB holdings are likely to start shrinking because it wouldn't be buying enough to replace those that are maturing. The bank held more than half of outstanding JGBs as of the end of December.

Expectations for smaller bond purchases have been growing since the central bank cut back on the size of a daily bond-buying operation in May. That briefly pushed the yield on benchmark 10-year JGBs to a nearly 13-year high of 1.1%, before the yield fell back below 1%.

Gov. Kazuo Ueda has repeatedly said that the bank plans to buy fewer JGBs once it confirms the market's reaction to the March policy changes.

The yen weakened after Friday's move. It was trading at 157.85 to the dollar shortly after the move, compared with around 157.10 before the announcement.

The Japanese currency has remained near its lowest level in more than three decades despite the government's recent yen-buying intervention as investors stick to the view that the interest-rate gap between the U.S. and Japan is likely to remain wide. Federal Reserve projections earlier this week showed that officials expect just one interest-rate cut this year, although recent data showed U.S. inflation eased in May.

Write to Megumi Fujikawa at [e-mail]

(END) Dow Jones Newswires

06-13-24 2357ET