BOJ defies market bets for policy adjustments, causing the yen to tumble

  • BOJ keeps interest rate targets, yield margin intact
  • BOJ Runs Market Operation Tool, Signals Status Quo On YCC
  • Board raises inflation forecasts but lowers growth forecasts

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

The surprise decision caused the yen to begin slipping against other currencies as investors reversed their bets expecting the central bank to review its yield-control policies.

In a two-day policy meeting, the BOJ unanimously maintained its yield curve control (YCC) targets, set at -0.1% for short-term rates and around 0% for 10-year rates.

The central bank has also not changed its guidance that 10-year bond yields can move 50 basis points either side of its target of 0%.

As a sign of its determination to continue defending the limit, the BOJ strengthened an important tool for market operations to more effectively curb increases in long-term interest rates.

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

“By demonstrating determination 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 expires in April.

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

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

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

Reuters charts


Since the December 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 challenge the central bank’s rate limit. fall with aggressive bond selling.

Kuroda has said repeatedly that the BOJ was in no hurry to reverse stimulus, much less 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 core consumer inflation forecast for the current fiscal year ending in March from 2.9% in October to 3.0%.

It also raised 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 is sticking to the view that prices will moderate as the effect of past increases in commodity costs fade.

The BOJ also cut its economic growth forecasts for fiscal 2023 and 2024 amid concerns that slowing global growth will weigh on the export-dependent economy.

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

Inflation is likely to reach a new 41-year high of 4.0% in December, according to a Reuters poll, although analysts expect price growth to moderate later this year on the back of recent falls in global commodity prices.

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

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