On June 14, the Bank of Japan issued a statement after the monetary policy meeting, maintaining the benchmark interest rate unchanged, but at the same time stated that it would reduce the purchase of government bonds to restore market rates.

After the Bank of Japan released its statement, the Japanese yen against the US dollar quickly fell, breaking through the 158 level, approaching the low in April this year. However, during the speech of Bank of Japan Governor Haruhiko Kuroda, the exchange rate of the Japanese yen against the US dollar quickly rebounded again.

The Bank of Japan keeps interest rates unchanged.

According to the Bank of Japan's statement, the Bank of Japan will maintain the benchmark interest rate between 0-0.1%, and it will announce a reduction in the scale of bond purchases after the July meeting, taking a critical step towards policy normalization. The Bank of Japan will explain the specific details of how to reduce the scale of bond purchases at the July policy meeting.

As far as the economy is concerned, the Bank of Japan stated that although some areas have shown some weakness, the Japanese economy has been moderately recovering. The suspension of shipments by some auto manufacturers has led to price increases. In addition, service prices continue to rise moderately, reflecting the beginning of wage increases. However, overall, the consumer price index has been rising steadily between 2.0%-2.5%.

Although the Bank of Japan reduced the scale of government bond purchases as expected, it did not disclose specific details, including time and scale, causing the market to believe that the Bank of Japan's attitude towards the current inflation level is quite mild.

After the interest rate decision was announced, the yen accelerated its depreciation against major currencies. The dollar against the yen rose above 158, the first time since April 29. The pound against the yen rose to 201.45, the highest in 16 years. Japanese government bond futures prices rose as much as 80 basis points to 144.26, the largest increase in prices since the end of last December. The Japanese stock market showed a slight increase.

However, during the speech of Bank of Japan Governor Haruhiko Kuroda, the exchange rate of the Japanese yen against the US dollar once again rose sharply. Kuroda said that if prices rise towards the target, the Bank of Japan will raise interest rates; it will set short-term interest rates at the July monetary policy meeting, while considering reducing the purchase of government bonds. In addition, Kuroda also said that the Bank of Japan may raise interest rates in July, depending on economic data.

According to statistics, as of the end of last month, the Bank of Japan held a scale of long-term Japanese government bonds of about 59.3 trillion yen, accounting for at least half or more of the size of the Japanese government bond market.

In March this year, at the monetary policy meeting of the Bank of Japan, which announced the end of its negative interest rate policy, central bank officials decided to continue purchasing government bonds at roughly the same pace but abandoned the yield curve control plan, while still Maximum possible reduction of relevant risks for instability in the government bond market, as it shifts towards monetary policy normalization. If the Bank of Japan decides to reduce the scale of bond purchases, the consequences may be a surge in government bond yields.

Analysts: The yen will continue to weaken

Regarding the Bank of Japan's announcement today, analysts have said that the yen may continue to weaken.

Alvin Tan, head of Asian forex strategy at the Royal Bank of Canada Capital Markets, said that the Bank of Japan will wait until the next meeting to announce the details of shrinking the bond purchase plan. This fact is much more moderate than the market's expectations. Currently, it is not clear whether the Bank of Japan has determined the specific scale of bond purchases, or needs to be decided at the next meeting. Therefore, the downward pressure of the yen against the dollar will continue to exist. The market may push the currency exchange rate below 158.

Tsutomu Saito, a Japanese stock strategist at Societe Generale, said that the likelihood of the Bank of Japan raising interest rates in July has decreased, and it will be easier for investors to maintain carry trades, as the Bank of Japan is less likely to raise interest rates earlier and the Federal Reserve is less likely to cut interest rates. Previously, some investors expected the Bank of Japan to announce more details of shrinking the bond purchase plan, but the Bank of Japan's statement today disappointed them. Combined with the reduced volatility, the yen may continue to weaken. The announcement of the "Bond Market Working Group" meeting is positive because it reduces market uncertainty. The Bank of Japan may be cautious about QT (quantitative tightening) to avoid the same mistakes as the Federal Reserve in 2019, when short-term US Treasury yields soared due to QT.

Edited by Jeffrey