By Leika Kihara
TOKYO (Reuters) -Bank of Japan Governor Kazuo Ueda on Wednesday took in stride recent rises in bond yields, saying they were a natural reflection of market expectations of future interest rate hikes by the central bank.
The remarks underscore the BOJ’s resolve to keep raising short-term interest rates, and to allow markets to freely price in the chance of further hikes in borrowing costs.
While long-term interest rates have risen since last year, their moves should primarily be determined by market forces, Ueda told parliament.
“Long-term interest rates move on various factors. But the biggest determinant is the market’s forecast on the outlook for our short-term policy rate,” Ueda told parliament on Wednesday.
“It’s natural for long-term rates to move in a way that reflects such market forecasts,” he said.
There was no big divergence between the BOJ’s view and that of markets, he added, when asked about the recent steady rise in bond yields.
Markets have been focusing on whether the BOJ would issue a fresh warning after Japanese government bond (JGB) yields rose to their highest levels in more than a decade this week.
Ueda’s remarks highlight the central bank’s intention to phase out its presence from the bond market and convince investors that having ended its bond yield control policy last year, it will no longer step in to keep yields ultra-low.
In a speech last week, BOJ Deputy Governor Shinichi Uchida said a healthy, functioning market requires traders to form their own view on the central bank’s rate path based on their projections on the economic outlook – signaling the bank’s preference to allow market forces to determine yield moves.
The benchmark 10-year yield hit a 16-year high of 1.575% on Monday, before sliding to 1.525% on Tuesday as investors sought safe-haven debt in the wake of sharp falls in U.S. and Japanese stock prices. It stood at 1.530% on Wednesday.
GLOBAL UNCERTAINTY LOOMS
Among factors driving up JGB yields were growing expectations the BOJ could raise rates sooner than initially thought on prospects of sustained wage and price gains.
Japan’s wholesale inflation, which is a leading indicator of consumer price moves, hit 4% year-on-year in February. Many big companies on Wednesday met union demands for substantial wage hikes for a third consecutive year.
But the outlook for Japan’s export-reliant economy has been clouded by fears higher U.S. tariffs could hurt global growth, which may prod the BOJ to go slow in raising rates.
Speaking at a separate parliament session later on Wednesday, Ueda said he was “very worried” about uncertainty surrounding overseas economic developments. “At present, underlying inflation remains below 2%,” he added.
The BOJ is widely expected to keep interest rates steady at 0.5% at its policy review later this month, though the board may discuss a hike as soon as in May with an eye on domestic inflation and market volatility, sources have told Reuters.
A majority of economists polled by Reuters expect the BOJ to hike rates again sometime during the third quarter.
The BOJ ended its huge monetary stimulus last year, including a policy capping long-term rates around zero, on the view Japan was on the cusp of durably hitting its 2% inflation target.
The central bank raised its short-term policy rate to 0.5% from 0.25% in January, and signaled readiness to keep hiking if wages continue to increase and support consumption.
(Reporting by Leika Kihara; Editing by Tom Hogue, Sam Holmes and Shri Navaratnam)
