Yen falls as BOJ rejects market bets for policy changes

  • BOJ retains interest rate target, yield band
  • BOJ boosts market operation tools, signals status quo on YCC
  • Board raises inflation projections but cuts growth projections

TOKYO, Jan 18 (Reuters) – The Bank of Japan kept ultra-low interest rates on Wednesday, including a bond yield cap, defying market expectations it had been struggling to defend against rising inflation. Will end its massive stimulus program amid pressure from the U.S.

The surprise decision sent the yen skidding against other currencies and bond yields fell the most in decades, as investors bet the central bank would end its yield control policy.

Instead of changing its stimulus program, the BOJ devised a new weapon to prevent long-term rates from rising too high – a move some analysts see as a sign that Governor Haruhiko Kuroda may take office during the remaining months of his term. Will hold off on making major policy changes, which ends in April.

“This move will allow us to lower long-term interest rates without directly affecting the supply and demand of the cash Japanese government bond (JGB) market,” Kuroda said at a news conference. “We want to use this instrument at different maturities and in different ways.”

Following its two-day policy meeting, the BOJ retained its yield curve control (YCC) targets, which were set by a unanimous vote at -0.1% for short-term interest rates and nearly 0% for the 10-year yield Was.

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

Kuroda said, “Uncertainty remains high about Japan’s economy. It is essential to support the economy with our stimulus policy to ensure that companies can raise wages.”

The BOJ’s decision to strengthen its key market operation tools is expected to help curb increases in long-term interest rates, but crucially underlines its firm commitment to protecting the cap.

“Widening the yield band or eliminating the YCC now would make the BOJ even more vulnerable to market attack,” said Izuru Kato, chief economist at Toton Research.

“By showing its resolve to use market tools more flexibly, the BOJ wanted to signal to markets that it would not make large monetary policy changes under Kuroda.”

Kuroda’s final policy meeting will be held on March 9-10, ending a decade at the bank that brought in radical monetary stimulus but ultimately failed to meet its objective of reviving anemic consumer demand. have failed.

The BOJ’s decision on Wednesday follows its surprise move to double the yield band last month, a tweak analysts say has failed to correct market distortions caused by its heavy bond purchases.

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

Japanese government bond (JGB) yields slumped to 0.37%, with the benchmark 10-year yield well below the BOJ’s 0.5% limit and marking the biggest one-day decline since November 2003 at one point .

Reuters Graphics

slow growth prospects

Since the December action, the BOJ has faced the biggest test for its YCC policy since its introduction in 2016 as rising inflation and higher wage prospects prompted traders to push back on the central bank’s yield cap with aggressive bond sales. Gave an excuse to attack.

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

Speaking in Davos after the BOJ’s decision, Trade Minister Yasutoshi Nishimura said Japan was nearing the stage where easing policy in the form of wage increases could be halted.

Market attention is already shifting to monetary policy under Kuroda’s successor, which will require an orderly exit from decades of ultra-low rates.

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

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 2.9% estimated in October.

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

However, it kept its inflation forecast for the fiscal year ending March 2024 at 1.6%, an indication that across-the-board raw material costs will ease due to the impact of the previous jump in prices.

Tokyo core CPI at new 40-year high

The BOJ also slashed its economic growth projections for the next two fiscal years, amid concerns slowing global demand will put pressure on the export-dependent economy.

However, Kuroda said the BOJ forecast wages would rise at a “significantly faster pace” as corporate profits hit record highs, the job market tightened and the economy was seen expanding above capacity for three straight years. has gone.

Japan’s core consumer inflation has 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 Tatsushi Kajimoto; Additional reporting by Kantaro Komiya and Daniel Lucink; Editing by Bradley Perret and Sam Holmes

Our Standards: The Thomson Reuters Trust Principles.

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