(Bloomberg) -- The Bank of Japan is making investors wait until its July meeting for details on its paring of bond buying, leaving the yen vulnerable to further declines.

The central bank’s decision Friday to stand pat on interest rates was widely expected, but traders were surprised by it just flagging a cut in debt purchases without laying out any figures or a timeline. 

Given that more than half of economists surveyed by Bloomberg had expected the central bank to begin cutting its purchases in June, the announcement was viewed by many analysts and investors as a delay in the normalization of policy that’s vital to the recovery of the currency. 

The yen slid versus the dollar to its lowest level since April, before trimming the move as Governor Kazuo Ueda spoke at his press briefing. Ueda pushed back against the view that the central bank can’t raise interest rates in July while simultaneously presenting its plans for cutting bond buying.

Benchmark 10-year government yields followed a similar trajectory to the currency, falling before regaining some ground. Japanese stocks closed 0.5% higher, defying a broader decline in Asian equities.

Ueda has repeatedly shown a determination to gradually normalize policy after more than a decade of massive stimulus, but the perceived pushing back of a change in bond buying points to lingering cautiousness on the board. The continued weakness in the yen will also likely keep policymakers on edge as they recall the drop in the currency after the April BOJ meeting. That slump culminated in Japan’s biggest ever foreign-exchange intervention. 

While the prevailing view among economists and analysts Friday was that the release of the bond-cutting plan in July would make it more difficult for the central bank to raise rates on the same day, some BOJ watchers saw further signs that a hike is in the pipeline for next month. 

“The BOJ is being cautious and buying time,” said Mari Iwashita, chief market economist at Daiwa Securities Co. “It’s unlikely the BOJ will raise interest rates in July when that now coincides with a decision to specify the bond-buying reductions.”

Speaking at a post-decision briefing, Ueda said the board had decided it needed more time to carefully consider the reductions. He indicated they would be sizable and go beyond piecemeal tweaks.

He also pushed back against the view that a rate hike was no longer possible next month.

“We will present a concrete plan for long-term JGB buying operations in July,” Ueda said. “Of course it’s possible for us to raise the short-term interest rate and adjust the degree of monetary easing at the same time depending on the information available then on the economy and prices.”

The yen pared its losses during the press briefing, and recovered to be little changed at 157.05 against the dollar at 6:41 p.m. in Tokyo, compared with 158.26 before he began speaking.

Economy jitters

Still, Friday’s decision suggests the currency is not the bank’s main priority.  

“The BOJ is judging that it’s not time to let yields go up higher after they have risen rather quickly in the past few months,” said Atsushi Takeda, chief economist at Itochu Research Institute. “Their concerns over the economy are outweighing concerns over pushing down the yen. Ueda is making it clear that he doesn’t directly respond to foreign exchange rates with action.”

The economy shrank at an annualized pace of 1.8% in the first three months of the year as it continues to sputter between growth and contraction. The data showed both consumers and companies cutting back on spending and unsold supplies building up on warehouse shelves as the strongest inflation trend in decades continues to crimp outlays in real terms.

Without clearer signs that the highest wage deals in decades are feeding into consumer spending, doubts will remain about the strength of the central bank’s hoped-for positive inflation cycle.

Since formally ditching the bank’s control of government debt yields in March, Ueda has said that buying bonds is no longer a monetary policy tool for the BOJ, but it is difficult for him to play down the significance of the move. 

A reduction from a pace of around ¥6 trillion ($38 billion) per month would likely leave purchases falling short of the amount of maturing bonds each month. That would signify the start of a quantitative tightening process that sends a clearer signal of the BOJ’s pulling back of support for the economy, optics that appear to have made board members uncomfortable about moving this month.

The Federal Reserve, which began its own QT process two years ago, has already started to phase out the campaign in order to ensure ample liquidity in money markets. Friday’s BOJ decision comes days after Fed officials dialed back their expectations for interest-rate cuts this year, in a move that weighed on the yen. 

What Bloomberg Economics Says...

“All told, the BOJ is continuing squarely down the path of exiting its unconventional policies and returning JGB yields to the hands of the market.”

— Taro Kimura, economist

For the full report, click here

The yen has shed about 10% against the dollar so far this year, taking its slide since the beginning of 2022 to around 27% and causing widespread alarm in Japan. A growing number of business executives have urged authorities to take steps to reverse the trend.

With the yen still in a feeble state, some analysts think it’s inevitable the government will have to step into markets again before the next meeting.

“The yen’s weakening, so I guess we’ll see more intervention this month,” said Nicholas Smith, a strategist at CLSA Securities. “Makes sense to buy Japanese assets now and profit when the BOJ does two hikes in the rest of the year and the Fed one cut, sending the yen stronger.”

Some economists still see a chance the first one will come next month.

“The BOJ disappointed market expectations today by postponing details on the bond plan. That will add to lingering momentum for yen depreciation,” said Hideo Kumano, executive economist at Dai-Ichi Life Research Institute and a former central bank official. “A July hike is still on the table.”

--With assistance from Yoshiaki Nohara, Winnie Hsu, James Mayger and Brian Fowler.

(Adds latest market moves, economist comments)

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