BOJ defies markets bets for policy tweaks. Yen tumbles

By Leika Kihara and Tetsushi Kajimoto

TOKYO, Reuters – Wednesday’s Bank of Japan kept ultra-low interest rate, including a bond-yield cap that it was fighting to keep in place, defying market expectation it would abandon its massive stimulus programme, which has been under increasing inflationary pressure.

Surprise decision sent the yen sliding against other currencies, and bond yields plummeting the most in decades. Investors lost all bets that they had placed anticipating that the central bank would change its yield control policy.

Instead of changing the stimulus programme, BOJ devised a new weapon that would prevent long-term rates increasing too much. Analysts interpreted this as a sign that Governor Haruhikokuroda will delay making major policy changes in the final months of his term which ends April.

The BOJ unanimously voted to keep its yield curve control (YCC), targets at -0.1% short-term interest rates, and around 0% 10-year yields, intact during a two-day policy meeting.

Graphic: BOJ keeps yield control policy unchanged https://www.reuters.com/graphics/JAPAN-ECONOMY/BOJ/zdpxdrnrzpx/chart.png

The guidance by the central bank that permits the 10-year yield to move 50 basis point either side of its 0% target has not been changed.

“Uncertainty concerning Japan’s economic future is very high.” Kuroda said that it was important to support the economy by implementing our stimulus policy. This will ensure that wages can be raised in companies.” Kuroda spoke at a news conference following the meeting.

“We will continue to pursue our price target by maintaining an ultra-easy policy. This will be accompanied by wage rises.” he stated.

The BOJ’s decision by the BOJ to increase its key market operation tool will not only help to curb long-term interest rate rises but also highlights its determination to protect the cap.

Izuru Cato, chief economist at Totan Research stated that dismantling YCC or increasing the yield band would have made the BOJ more vulnerable to market attack.

“By demonstrating its determination to use market instruments more flexiblely, the BOJ wanted signal to markets that it won’t make large monetary policy changes under Kuroda.”

Kuroda’s final policy meeting will take place on March 9-10. It marks the end to a decade of his leadership at the bank. He brought about radical monetary stimulus but failed to reach its goal of sustainably reviving weak consumer demand.

The BOJ’s Wednesday announcement follows its surprise decision last month to raise the yield band by 2%. Analysts say this tweak has failed to correct market distortions that result from its heavy bond-buying.

On the BOJ’s announcement the dollar rose 2.4% and reached 131.20yen. This was its largest one-day jump since March 2020. Meanwhile, the Nikkei stock index jumped 2.5%, reaching 26,791.12, its highest close ever since Dec. 19.

Japanese government bond yields (JGB) plunged across the curve. The benchmark 10-year yield fell to 0.37%, just below the BOJ’s 0.5% ceiling. This was the biggest single-day fall since November 2003.

Graphic: Japan’s core inflation hits fresh 40-year high https://www.reuters.com/graphics/JAPAN-ECONOMY/INFLATION/gdpzqqabavw/chart.png

DIMMING PROSPECTS

The BOJ has seen its YCC policy put to the most severe test since its inception in 2016. Inflation and rising wages provided traders with an excuse to sell aggressively to lower the yield cap.

On Wednesday, the BOJ published a quarterly update. It raised its core consumer inflation projection for the current fiscal-year ending in March to 3.0% from 2.9% as projected in October.

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

The inflation forecast for fiscal 2023 was kept at 1.6%. This is a good sign that the board remains committed to the view that prices will decrease as the effects of past increases in raw material costs diminish.

Graphic: Tokyo core CPI at a new 40-year high https://www.reuters.com/graphics/JAPAN-ECONOMY/INFLATION/movakjnrrva/chart.png

In light of concerns that slowing global growth would impact the export-dependent economy, the BOJ also reduced its projections for economic growth in fiscal 2023/2024.

Japan’s core consumer inflation has exceeded the BOJ 2% target for eight consecutive month, as companies increased prices to pass higher material costs on to their customers.

According to a Reuters poll on Friday, inflation is expected to hit a new 41-year high in December at 4.0%. However, analysts anticipate price growth to slow down later in the year due to recent falls in global commodity prices.

(Reporting by Leika Kajihara and Tetsushi Kajimoto; additional reporting by Kantaro Koiya, Daniel Leussink; Editing done by Bradley Perrett & Sam Holmes