Markets

BOJ defies market bets for policy adjustments, sending yen tumbling

  • The BOJ keeps the interest rate targets, the yield band intact
  • BOJ increases market operation tool, signals status quo on YCC
  • The board raises the inflation forecasts, but lowers the growth forecasts

TOKYO, Jan 18 (Reuters) – The Bank of Japan kept interest rates ultra-low on Wednesday, including a bond yield ceiling it struggled to defend, defying market expectations that it would phase out its massive stimulus program in the wake of rising inflationary pressures.

The surprise decision sent the yen tumbling against other currencies as investors liquidated bets they had made in anticipation that the central bank would revise its interest rate control policy.

At a two-day policy meeting, the BOJ kept its yield curve control (YCC) targets intact, set at -0.1% for short-term yields and around 0% for the 10-year yield, by unanimous vote.

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

In a sign of its determination to keep defending the cap, the BOJ strengthened one key tool for market operation more effectively to curb increases in long-term interest rates.

“Widning the yield band or dismantling the YCC now would have made the BOJ even more vulnerable to market attacks,” said Izuru Kato, chief economist at Totan Research.

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

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

The decision follows the surprise move by the BOJ last month doubling the yield band, a tweak that analysts say has failed to correct market distortions caused by its large bond purchases.

The dollar rose 2.4% to 131.20 yen on the BOJ’s announcement, marking its biggest one-day jump since March 2020, while the Nikkei stock average rose more than 600 yen.

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

Reuters graphics

DAMPERING GROWTH PROSPECTS

Since December’s action, the BOJ has faced the biggest test of its YCC 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 sales.

Kuroda has repeatedly said the BOJ was in no rush to scale back stimulus, 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 BOJ raised its forecast for core consumer inflation for the current fiscal year ending in March to 3.0% from 2.9% expected in October.

It also revised the inflation forecast for the fiscal year ending March 2024 to 1.8% from 1.6% three months ago.

But the inflation forecast for fiscal 2023 was kept at 1.6%, a sign that the board maintains that prices will moderate as the effect of past increases in commodity costs fades.

The BOJ also lowered its economic growth projections for fiscal 2023 and 2024, amid concerns that a slowdown in global growth will weigh on the export-dependent economy.

Japan’s core consumer inflation has exceeded the BOJ’s 2% target for eight straight months as companies raised prices to pass on higher commodity costs to households.

Data due on Friday is likely to show inflation hit a new 41-year high of 4.0% in December, according to a Reuters poll, although analysts expect price growth to slow later this year, reflecting recent decline in global commodity prices.

Reporting by Leika Kihara and Tetsushi Kajimoto; Additional reporting by Kantaro Komiya and Daniel Leussink; Editing by Bradley Perrett and Sam Holmes

Our standards: Thomson Reuters Trust Principles.

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