The Bank of Japan is defying market bets to make policy adjustments, causing the yen to weaken

  • The BoJ keeps interest rate targets, and yield range intact
  • The Bank of Japan is stepping up the market operating tool, and indicates the status quo on YCC
  • The board raises inflation expectations but lowers growth expectations

TOKYO (Reuters) – The Bank of Japan on Wednesday maintained ultra-low interest rates, including the bond yield ceiling it has been struggling to defend, defying market expectations that it would phase out its massive stimulus program in the wake of mounting inflationary pressures. .

The sudden decision sent the yen sliding against other currencies, as investors dumped their bets in anticipation of the central bank reforming its yield control policy.

At the two-day policy meeting, the Bank of Japan maintained its yield curve control (YCC) targets, set at -0.1% for short-term interest rates and around 0% for the 10-year yield, by unanimous vote.

The central bank also made no change to its guidance that allows the 10-year bond yield to move 50 basis points either side of its 0% target.

In a sign of its intention to continue to defend the ceiling, the Bank of Japan strengthened a key market operating tool to more effectively limit the rise in long-term interest rates.

“Expanding the yield band or unbundling the YCC now will make the BoJ more vulnerable to market attack,” said Izuru Kato, chief economist at Totan Research.

“By showing its intention to use market tools more flexibly, the Bank of Japan wanted to signal to the markets that it will not make major changes in monetary policy under Governor Haruhiko Kuroda.”

Kuroda’s second five-year term ends in April.

The decision follows the Bank of Japan’s surprise move last month to double the yield band, an adjustment that analysts say failed to correct market distortions caused by heavy bond buying.

The dollar rose 2.4 percent to 131.20 yen after the Bank of Japan’s announcement, marking the largest one-day jump since March 2020, while the Nikkei index jumped more than 600 yen.

The yield on 10-year Japanese government bonds fell 10.5 basis points, to 0.395%.

Reuters graphics

Decreased growth prospects

Since the December action, the Bank of Japan has faced the biggest test of BoJ policy since its introduction in 2016 as rising inflation and the prospect of higher wages gave traders an excuse to attack the central bank’s yield ceiling with aggressive bond selling.

Kuroda has said repeatedly that the Bank of Japan is in no rush to ask for stimulus again, let alone raise interest rates, until wages rise enough to boost household income and consumption, allowing companies to raise prices.

In a quarterly report released on Wednesday, the Bank of Japan raised its forecast for core consumer inflation for the current fiscal year ending in March to 3.0%, from the 2.9% expected in October.

It also revised inflation expectations for the fiscal year ending in March 2024 up to 1.8%, from 1.6% three months earlier.

But the inflation forecast for fiscal 2023 was maintained at 1.6%, a sign that the board is committed to the view that prices will moderate as the impact of past increases in raw material costs fades.

The Bank of Japan also lowered its economic growth forecasts for the fiscal years 2023 and 2024, amid fears that slowing global growth will affect the export-dependent economy.

Japan’s core consumer inflation has exceeded the Bank of Japan’s 2% target for eight straight months, as companies have raised prices to pass higher raw material costs onto households.

Data released on Friday is likely to show that inflation hit a 41-year high of 4.0% in December, according to a Reuters poll, although analysts expect price growth to moderate later this year, reversing recent declines in world commodity prices.

Additional reporting by Leika Kihara and Tetsushi Kajimoto; Additional reporting by Kantaro Cumia and Daniel Lusink. Editing by Bradley Perrett and Sam Holmes

Our standards: Thomson Reuters Trust Principles.

Leave a Reply

Your email address will not be published. Required fields are marked *