In defiance of market expectations that it would gradually wind down its enormous stimulus programme in the midst of escalating inflationary pressure, the Bank of Japan maintained its record-low interest rates on Wednesday, including a bond yield ceiling it was trying to keep.
Investors undid bets they placed assuming the central bank would change its yield control strategy in response to the surprise decision, which sent the yen plunging against other economies and bond yields falling to their lowest levels in decades.
Some experts interpreted this action by the BOJ as an indication that Governor Haruhiko Kuroda will wait off on making significant policy changes during his tenure, which ends in April, rather than revising its stimulus programme.
The BOJ maintained its yield curve control (YCC) objectives, set at -0.1% for relatively brief interest rates and about 0% for the 10-year yield, at a two-day policy meeting.
The central bank did not alter its advice, which permits a 50 basis point range for the yield on 10-year bonds around its 0% objective.
The BOJ strengthened a crucial market operations tool to more effectively halt increases in long-term interest rates, underlining its determination to continue defending the ceiling.
Izuru Kato, a chief economist at renowned Totan Research, claimed that widening the yield band or eliminating YCC now would have left the BOJ even more open to attack from the market.
The BOJ intended to send a message to markets that it won’t make significant adjustments to the monetary policy under Kuroda by demonstrating its determination to employ market instruments more flexibly.
On March 9–10, Kuroda will hold his final policy meeting, capping a decade in charge of the institution that pioneered radical monetary stimulus.
The BOJ’s unforeseen verdict to quadruple the yield band in December was shadowed by the decision, which analysts claim did not effectively address market alterations brought on by its noteworthy bond purchases.
The BOJ news caused the dollar to increase by 2.4% to 131.20 yen, which was the greatest one-day increase since March 2020. The Nikkei share average also increased by even more than 600 yen.
The benchmark 10-year yield for the famous Japanese government bonds (JGBs) fell to 0.37%, far below the BOJ’s 0.5% cap and at one point registering the largest one-day loss since November 2003, as rates fell across the curve.
Since its implementation in 2016, the BOJ’s YCC policy has been put to its most severe test.
Higher inflation and the likelihood of increased salaries gave traders a justification to challenge the yield cap set by the central bank by engaging in aggressive bond selling.
Kuroda has stated time and time again that the BOJ is not in a hurry to reduce stimulus, let alone hike interest rates, unless salaries increase to the point where household income and demand are increased, allowing businesses to raise prices.
The BOJ increased its basic consumer inflation projection for the present fiscal year concluding in March from 2.9% expected in October to 3.0% in a quarterly report issued on Wednesday.
Inflation was also predicted to increase from 1.6% to 1.8% for the said fiscal year which ends in March 2024.
The board is still of the opinion that prices will moderate as a result of previous spikes in raw material costs, but the inflation prediction for fiscal 2023 was kept at 1.6%.
Amid concerns that the export-dependent economy will be negatively impacted by slowing global development, the BOJ has reduced its economic growth predictions for the fiscal years 2023 and 2024.
As a result of price increases made by businesses to pass on to consumers higher raw material costs, Japan’s primary customer inflation has gone above the BOJ’s 2% goal for eight consecutive months.
According to a poll, data that will be released on Friday will likely indicate that inflation reached a new 41-year peak of 4.0% in December.
Analysts anticipate that price increases will reduce later this year as a result of recent reductions in global commodity prices.