Bank of Japan defies market pressure and holds firm on yield curve control

The Bank of Japan has resisted market pressure and left its yield control measures unchanged, sending the yen lower and stocks higher as it stuck to the core of its ultra-loose monetary policy.

Traders in Tokyo said the decision, which came after a two-day meeting of the BoJ’s longest-serving governor, Haruhiko Kuroda, should pressure his successor to end Japan’s decade-long experiment in monetary easing. .

The BoJ’s decision follows weeks of turmoil in Japan’s bond market as yields rose. The central bank sent about 6 percent of Japan’s gross domestic product last month by buying bonds to try to get yields in the target range.

Although financial markets have avoided the same turmoil that has affected JGBs trading, the yen fell nearly 2 percent against the dollar in the minutes following the BoJ’s announcement.

Benjamin Shatil, a financial analyst at JPMorgan in Tokyo, said it was difficult to interpret the yen’s move on Wednesday as a problem, with markets thinking the BoJ should ease pressure.

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“In some ways the decision to not change today – neither to pursue policy nor to advance guidance – sets the BoJ up for a long battle with the market,” Shatil said.

Following the BoJ’s surprise decision in December to allow interest rates to rise on Japan’s 10-year government bonds, markets grappled with the prospect of the world’s top banks still clinging to a loose monetary regime.

But instead of abandoning its benchmark yield control (YCC), the central bank remained unchanged on Wednesday, saying it would continue to allow the 10-year yield to fluctuate by 0.5 percent above or below its target. . It kept the overnight rate at minus 0.1 percent.

Kuroda, who will step down in April after a 10-year stint as BoJ governor, said last month that the change in YCC limits was intended to improve the performance of the stock market and was not a “way out”.

Since its last meeting on December 20, the BoJ has spent about ¥34tn ($265bn) in bond purchases, with the 10-year bond yield continuing to rise above 0.5%. This led to the markets forcing the central bank to abandon the yield target.

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“The Kuroda bazooka is over and now it’s up to the new governor to turn things around and start over,” said Mari Iwashita, an economist at Daiwa Securities. Before the policy meeting, Iwashita said that the YCC plan was “in a permanent state”.

“The pace of bond purchases is not sustainable,” Iwashita said before the policy meeting. “Obviously we’re seeing YCC’s limits in the face of rising yields. Now it’s in a deadlock.”

Fumio Kishida, Japan’s prime minister, is expected to name Kuroda’s successor within weeks.

The central bank on Wednesday also raised its inflation outlook for the fiscal year ending in March, showing Japan’s inflation, which excludes fresh food prices, to 3 percent instead of the previously forecast 2.9 percent. It now expects growth of 1.8 percent in 2024, instead of 1.6 percent.

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Japan’s consumer spending rose 3.7 percent in November, its fastest pace in nearly 41 years and exceeding the BoJ’s 2 percent target for the eighth consecutive month.

Although inflation is still lower in Japan compared to the US and Europe, inflation has risen sharply, prompting investors to dispute Kuroda’s claims that the central bank is not ready to raise interest rates.

Takeo Kamai, head of brokerage at CLSA in Tokyo, said futures trading after the BoJ’s announcement showed that financial markets would do well on the news that Japanese companies are currently reluctant to tighten monetary policy.

That could be a short-term boost to risk assets, Kamai said, but some investors may consider taking profits in banks, which have risen in recent weeks on market growth as Japan hopes for long-term stabilization of its currency. process.

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