BOJ defies market bets for policy tweaks, yen tumbles

  • BOJ keeps interest rate targets, yield band intact
  • The BOJ increases the market operation tool, indicating the status quo on the YCC
  • The board raises inflation forecasts but cuts growth forecasts

TOKYO, Jan 18 (Reuters) – The Bank of Japan kept interest rates very low on Wednesday, including a buffer it has struggled to maintain, contrary to market expectations that it will end its massive stimulus program amid inflationary pressure.

The surprise decision sent the yen against other currencies and bond yields to their lowest in decades as investors heeded bets that the central bank would adjust its yield control policy.

Instead of changing its stimulus program, the BOJ created a new weapon to prevent long-term rate hikes — a move that some analysts took as a sign that Governor Haruhiko Kuroda will hold off on major policy changes in the remaining months of his term. which ends in April.

“This step will allow us to lower long-term interest rates without directly affecting the supply and demand of the Japanese government money market (JGB),” Kuroda told a news conference. “We want to use this tool for different sizes, and in different ways.”

After its two-day policy meeting, the BOJ unanimously set its yield curve (YCC) targets, which were set at -0.1% for short-term interest rates and around 0% for the 10-year yield. make a.

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

“Uncertainty about Japan’s economy is high. It is necessary to support the economy with its stimulus policy so that companies can raise wages,” Kuroda said.

The BOJ’s decision to strengthen its main market operating tool is expected to help prevent a rise in long-term interest rates, but importantly signals its continued commitment to protecting the cap.

“Expanding the yield curve or unwinding the YCC now would have made the BOJ even more vulnerable to market attack,” said Izuru Kato, chief economist at Totan Research.

“By demonstrating its willingness to use market instruments more flexibly, the BOJ wanted to signal to the markets that it would not make major changes to monetary policy under Kuroda.”

Kuroda’s next policy meeting will be held on March 9-10, ending a decade in which the bank introduced radical monetary stimulus but ultimately failed to achieve its ongoing goal of reviving anemic consumer demand.

The BOJ’s decision on Wednesday follows its surprise move last month to double interest rates, which analysts say failed to correct market distortions caused by its heavy bond buying.

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The dollar briefly rose 2.4% to 131.20 yen on the BOJ’s announcement, marking its biggest one-day gain since March 2020, while the Nikkei stock average (.N225 ) climbed 2.5% to 26,791.12, its highest close since Dec. 19.

Japanese government bond (JGB) yields fell on average and the 10-year yield fell to 0.37%, well below the BOJ’s 0.5% and the biggest one-month decline since November 2003. fixed the day.

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DIMMING PROSPECTS FOR DEVELOPMENT

Since the December action, the BOJ has faced the biggest test of its YCC policy since it was first introduced in 2016 as rising inflation and the prospect of higher wages prompted traders to sell bonds. attackers attack the central bank’s production capacity.

While the BOJ has decided to hold off for now, some lawmakers who once supported aggressive monetary easing now see the end of the YCC as inevitable.

In Davos after the BOJ’s decision, trade minister Yasutoshi Nishimura, for one, said Japan is close to the point where easy policy can be stopped as wages rise.

Market attention is already turning to monetary policy under successor Kuroda, who needs to steer an orderly exit from decades of ultra-low rates.

“Whatever message the current BOJ leadership sends, market expectations of a future hike to the YCC will continue,” said Toru Suehiro, chief economist at Daiwa Securities.

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In a quarterly report released on Wednesday, the BOJ raised its core consumer inflation forecast to 3.0% for the current fiscal year ending March, from 2.9% forecast in October.

It also revised the inflation forecast for the fiscal year ending March 2025 to 1.8% from 1.6% previously.

However, it kept its inflation forecast for the fiscal year ending March 2024 at 1.6%, a sign the panel believes prices will moderate as the impact of recent increases in raw material costs spreads.

Tokyo’s core CPI is at a 40-year high

The BOJ also cut its economic growth forecasts for the next two fiscal years, amid concerns that slowing global demand will weigh on the export-dependent economy.

Kuroda, however, said the BOJ expected wages to rise at a “quick pace” as corporate profits hit record highs, the labor market tightens and the economy expands above potential for three straight years.

Japan’s core consumer inflation exceeded the BOJ’s 2% target for eight straight months, as companies raised prices to pass on higher raw material costs to households.

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

Our Standards: The Thomson Reuters Trust Principles.

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