Defying market pressure, the Bank of Japan left its measures to contain the yield curve unchanged, causing the yen to fall sharply and equities to rise as it adhered to a core pillar of its ultra-easy monetary policy.

Tokyo traders said the decision, which came after a two-day meeting, the penultimate under the BoJ’s longest-serving governor, Haruhiko Kuroda, was likely to put even greater pressure on his successor to end the two-decade-long Japan’s experiment with massive monetary easing. .

The BoJ’s decision follows weeks of turmoil in Japan’s government bond market as yields rose. The central bank spent the equivalent of about 6 percent of Japan’s gross domestic product buying bonds last month to try to keep interest rates within its target range.

While currency markets avoided the same turmoil that gripped JGB trading, the yen plunged nearly 2 percent against the dollar in the minutes following the BoJ’s announcement.

Benjamin Shatil, a currency strategist at JPMorgan in Tokyo, said it was difficult to interpret the yen’s movement on Wednesday as a bow, with markets assuming the BoJ would eventually have to give in to pressure.

“In some ways, today’s decision not to make any changes — either to policy or to forwarded guidance — sets the BoJ up for a long battle with the market,” Shatil said.

Following the unexpected decision by the BoJ in December to authorize a higher target ceiling on 10-year Japanese government bond yields, markets faced the possibility of a historic upheaval by the last of the world’s largest central banks to still sticking to an ultra-loose monetary regime.

But instead of scrapping its yield curve containment (YCC) policy, the central bank made no further changes on Wednesday, saying it would continue to allow 10-year bond yields to fluctuate by 0.5 percentage points above or below its target return of zero. . It kept overnight interest rates at minus 0.1 percent.

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

Since its last policy meeting on Dec. 20, the BoJ has spent about ¥34 trillion ($265 billion) on bond purchases, with 10-year bond yields continuing to climb above 0.5 percent. This prompted markets to put pressure on the central bank to let go of its interest rate target altogether.

“The Kuroda bazooka is over and now it’s really up to the new governor to change things up and start all over again,” said Mari Iwashita, chief market economist at Daiwa Securities. Prior to the policy meeting, Iwashita had said the YCC cadre was in “terminal condition”.

“This rate of bond purchases is not sustainable,” Iwashita had said ahead of the policy meeting. “Obviously, we see the limits of the YCC in the face of rising interest rates. It is now in a terminal condition.”

Fumio Kishida, the Prime Minister of Japan, will name Kuroda’s successor in a few weeks.

The central bank on Wednesday also raised its inflation outlook for the fiscal year ending March, estimating Japan’s core inflation rate, which excludes volatile fresh food prices, at 3 percent instead of the previously forecast 2.9 percent. It also now expects 1.8 percent inflation in fiscal year 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 BoJ’s target of 2 percent for the eighth consecutive month.

While inflation in Japan is still mild compared to the US and Europe, price increases have gained momentum, leading investors to challenge Kuroda’s claim that the central bank had no intention of raising interest rates.

Takeo Kamai, head of execution at CLSA in Tokyo, said futures trading in the immediate wake of the BoJ’s announcement suggested stock markets would react positively to news that corporate Japanese was spared any move toward monetary tightening for now.

That would boost risky assets in the short term, Kamai said, but some investors may decide to take profits on banking stocks, which have soared in recent weeks amid growing market expectations that Japan was moving toward a long-awaited normalization of its monetary policy. policy. policy.