Asian markets breathe sigh of relief as BOJ says current rates appropriate; Nikkei gains 1%

Asian Stock Markets Today: Asian markets breathed a sigh of relief on Friday as the incoming head of Japan's central bank soothed fears of an early end to super-easy monetary policy, nudging bond yields lower globally.

Kazuo Ueda, who will take over as governor of the Bank of Japan (BOJ) in April, began three hours of speaking to parliament at 9:30 a.m. (0030 GMT), offering markets a first glimpse of how the new-look central bank could steer an exit from ultra-low interest rates. 

Incoming Bank of Japan (BOJ) Governor Kazuo Ueda said on Friday it was appropriate to maintain ultra-loose monetary policy as inflation has yet to sustainably and steadily meet the central bank's 2 per cent target.

Ueda said the recent rise in consumer inflation was driven mostly by surging import costs of raw material, rather than strong domestic demand.

He also warned that uncertainties regarding Japan's economic recovery remained "very high," warranting the BOJ to maintain ultra-loose monetary policy.

"Japan's trend inflation is likely to rise gradually. But it will take some time for inflation to sustainably and stably achieve the BOJ's 2 per cent target," Ueda told the lower house confirmation hearing.

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"It's true there are various side-effects emerging from the stimulus. But the BOJ's current policy is a necessary, appropriate means to achieve 2 per cent inflation."

The yen wobbled either side of steady as Ueda spoke and was last about 0.3 per cent stronger at 134.34 per dollar.

If trend inflation heightens significantly and sustained achievement of the BOJ's 2 per cent target comes into sight, the central bank must consider normalising monetary policy, Ueda said.

But if trend inflation lacks strength, the central bank must consider how to maintain its ultra-easy policy, he added.

If the BOJ were to phase out stimulus, it would do so by raising interest rates on financial institutions' reserves parked with the central bank rather than selling bonds, Ueda said.

"There are various possibilities on what YCC could look like in the future," he said. Ueda declined to comment on what specific measures the BOJ could take to tweak YCC.

Earlier this month, the government named the 71-year-old academic as its pick to become next central bank governor in a surprise choice that markets saw as heightening the chance of an end to the unpopular yield curve control (YCC) policy.

With inflation exceeding the BOJ's 2 per cent target, Ueda faces the delicate task of phasing out YCC, which has drawn public criticism for distorting market functions and crushing banks' margins.

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Upon approval by parliament, he will succeed incumbent Haruhiko Kuroda, whose second, five-year term ends on April 8.

"It seems to be a continuation of the stance taken by Kuroda, though I think it's difficult to tell right now," Moh Siong Sim, currency strategist at Bank Of Singapore, said of Ueda's comments.

"He's treading a fine line in the sense of trying to find a way to exit (YCC) without being too disruptive on the dollar/yen direction."

The government's deputy governor nominees - former banking watchdog head Ryozo Himino and BOJ executive Shinichi Uchida - will testify in the afternoon after Ueda.

The upper house of parliament will hold the confirmation hearing for Ueda on Monday, and that for the two deputies on Tuesday.

The nominations need the approval of both chambers of the Diet, which are effectively done deals as the ruling coalition holds solid majorities in both.

Under YCC, the BOJ guides short-term interest rates at -0.1 per cent and the 10-year bond yield around 0 per cent as part of efforts to sustainably achieve its 2 per cent inflation target.

Facing pressure from rising global interest rates, the BOJ was forced to raise in December the implicit cap for its 10-year yield target to 0.5 per cent from 0.25 per cent - a move that fuelled market expectations of a near-term tweak to YCC.