The yen plunged on Wednesday after the Bank of Japan decided to maintain its ultra-easy monetary policy, defying market expectations that rising inflation could force the central bank to move away from low interest rates.
The BOJ kept its yield curve control (YCC) targets unchanged as it wrapped up a two-day policy meeting on Wednesday. That left short-term yields at an ultra-dovish minus 0.1% and the 10-year Japanese government bond yield around 0%.
The YCC policy is a pillar of the central bank’s efforts to keep interest rates low and stimulate the economy.
The surprise decision caused the yen to fall. It briefly fell 2.7% against the US dollar around It later pared some losses, last trading 1.3% lower at 129.76 yen per dollar. Last Friday, the currency hit a seven-month high of 127.46 against the dollar.
“Japan’s economy, despite being affected by factors such as high commodity prices, has picked up as the resumption of economic activity has progressed while public health has been protected from Covid-19,” the central bank said in its quarterly outlook report, adding that a decline in foreign economies can put downward pressure on growth.
BOJ Governor Haruhiko Kuroda explained the decision at a press conference.
“Uncertainty regarding Japan’s economy is very high. It is necessary to support the economy with our stimulus policy, to ensure that companies can raise wages, Kuroda said in comments published by Reuters. “By maintaining an ultra-easy policy, we will strive to reach our price target stably and sustainably accompanied by wage increases.”
Kuroda expects core consumer inflation to decline below 2% towards the latter half of fiscal year 2023.
Kuroda will step down in April after a decade in office.
Last month, the BOJ shocked global markets by allowing the 10-year JGB yield to move 50 basis points either side of the 0% target, in a move that fueled speculation that the central bank may follow suit with other major economies by allowing interest rates to rise further.
The unexpectedly hawkish decision sent stocks tumbling, while yen and bond yields soared.
Kuroda said there is no need to further widen the yield band after December’s move.
“It was not long ago that we decided on our measures in December. It will probably take some more time before the measures begin to have an effect to fix the market function. However, with our flexible market operations, we expect the market function to improve going forward, he said, according to Reuters. “YCC is therefore likely to be sustainable.”