The Bank of Japan is defying market pressure and firmly sticking to yield curve control

The Bank of Japan defied market pressures and left its yield curve control measures unchanged, sending the yen sharply lower and stocks rallying as it stuck to the mainstay of its ultra-loose monetary policy.

Traders in Tokyo said the decision, which came after a two-day meeting, the penultimate one under the Bank of Japan’s longest-serving governor, Haruhiko Kuroda, is likely to put greater pressure on his successor to end Japan’s two-decade experiment with massive monetary easing. .

Follows the decision of the Bank of Japan weeks of turmoil In the Japanese government bond market, during which yields rose. The central bank has used the equivalent of about 6 percent of Japan’s GDP over the past month to buy bonds to try to keep yields within its target range.

Although the currency markets have avoided the same turmoil that wracked trading JGBsthe yen fell nearly 2 percent against the dollar in the minutes that followed the Bank of Japan’s announcement.

It was difficult to interpret the yen’s move on Wednesday as a reversal, said Benjamin Chatel, a currency analyst at JPMorgan in Tokyo, as markets assume that BoJ You will eventually have to back off the pressure.

“In some ways, the decision not to make any changes today — neither to policy nor guidance guidance — puts the Bank of Japan into a longer-term confrontation with the market,” Chatel said.

Japan’s Topix stock index rose 1.2 percent in the afternoon.

Bank of Japan An unexpected decision in December Allowing a higher cap on the 10-year Japanese government bond yield target has raised the possibility of a historic pivot by the world’s last leading central banks still wedded to an ultra-loose monetary regime.

But rather than scrap its policy of yield curve control (YCC), the central bank made no further changes on Wednesday, saying it would continue to allow the 10-year bond yield to fluctuate 0.5 percentage point above or below its target yield of zero. . It kept the overnight interest rate at minus 0.1 percent.

Kuroda, who will step down in April after a record 10 years as BoJ governor, said last month that the changes to the BoJ’s limits are intended to improve the performance of the bond market and are not an “exit strategy.”

Since its last policy meeting on Dec. 20, the Bank of Japan has spent about 34 trillion yen ($265 billion) on bond purchases, with yields on the 10-year note still rising above 0.5 percent. This prompted the markets to pressure the central bank to abandon the yield target altogether.

“The era of the Bazooka Kuroda is over and now it’s really up to the new ruler to turn things around and start from scratch,” said Mari Iwashita, chief market economist at Daiwa Securities. Before the policy meeting, Iwashita said the YCC framework was in a “final state.”

“This pace of bond buying is not sustainable,” Iwashita said before the policy meeting. “We clearly see the limitations of YCC in the face of rising returns. It is now in a terminal state.”

Fumio Kishida, the Prime Minister of Japan, is due to name Kuroda’s successor within weeks.

The central bank also on Wednesday raised its inflation forecast for the fiscal year ending in March, expecting Japan’s core inflation, which excludes volatile fresh food prices, to come in at 3 percent instead of the previous forecast of 2.9 percent. It also now expects inflation of 1.8 percent in fiscal 2024, instead of 1.6 percent.

Japan’s consumer price index rose 3.7 percent in November, its fastest pace in nearly 41 years and above the Bank of Japan’s 2 percent target for the eighth consecutive month.

Although inflation remains moderate in Japan compared to the US and Europe, price increases have picked up pace, prompting investors to challenge Kuroda’s assertion that the central bank did not plan to raise interest rates.

Takeo Kamei, chief executive at CLSA in Tokyo, said futures trading after the BoJ’s announcement suggests stock markets will react positively to the news that Japanese companies have for the time being spared the move toward monetary tightening.

Kamai said some investors may decide to take profits from bank stocks, which have risen in recent weeks on expectations that Japan is moving towards normalizing its monetary policy.