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The BOJ defies market bets for policy adjustments, sending the 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 cuts the growth forecasts

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

The surprise decision sent the yen sliding against other currencies as investors liquidated bets they had made in anticipation of the central bank revising its yield controls.

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

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

In a sign of its determination to continue to defend the cap, the BOJ strengthened a key market operations tool to more effectively 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 BOJ’s surprise move last month to double the yield band, an adjustment that analysts say has failed to correct market distortions caused by the heavy bond buying.

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

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

Reuters graphics


Since December’s action, the BOJ has faced the biggest test of its YCC policy since it was introduced in 2016, when 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 businesses 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 to 3.0%, from the 2.9% forecast in October.

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

But the inflation forecast for the 2023 financial year was maintained at 1.6%, a sign that the board is sticking to the view that prices will ease as the effects of past rises in commodity costs fade.

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

Japan’s core consumer inflation has exceeded the BOJ’s 2% target for eight consecutive 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 inflation to slow later this year reflecting recent falls 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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