BOJ defies market bets for policy tightening, sending yen lower

BOJ defies market bets for policy tightening, sending yen lower

  • BOJ keeps interest rate targets, yield band intact
  • BOJ increases market trading tool, signals status quo in YCC
  • Board raises inflation forecasts but cuts growth projections

TOKYO, Jan 18 (Reuters) – The Bank of Japan kept interest rates ultra-low on Wednesday, including a bond yield cap it was struggling to defend, defying market expectations that it would phase out its massive stimulus program in the wake of the rising inflationary pressure. .

The surprise decision sent the yen tumbling against other currencies as investors canceled bets they had made in anticipation that the central bank would review its yield control policy.

In a two-day policy meeting, the BOJ kept intact its YCC targets, set at -0.1% for short-term interest rates and around 0% for short-term yields. 10 years, unanimously.

The central bank also did not change its guidance which allows the 10-year bond yield to move 50 basis points to either side of its 0% target.

In a sign of its determination to continue to defend the cap, the BOJ beefed up a key market operations tool to more effectively stem long-term interest rate hikes.

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

“By showing its determination to use market tools more flexibly, the BOJ wanted to signal to markets that it will not make major changes to monetary policy under Governor Haruhiko Kuroda.”

Kuroda’s second five-year term ends in April.

The decision follows the BOJ’s surprise move last month to double the yield band, an adjustment that analysts say has failed to correct market distortions caused by its heavy bond buying.

The dollar rose 2.4% to 131.20 yen following the BOJ’s announcement, marking its biggest one-day jump since March 2020, while the Nikkei stock index rose more than 600 yen.

The yield on the 10-year Japanese government bond fell 10.5 basis points to 0.395%.

Reuters charts

GROWTH OUTLOOK DIMINISHES

Since the December action, the BOJ has faced the biggest test of its YCC policy since its introduction in 2016, as rising inflation and prospects for higher wages gave traders an excuse to attack the cap. central bank yield with an aggressive sale of bonds.

Kuroda has repeatedly said that the BOJ was in no rush to cut stimulus, let alone raise interest rates, until wages rose enough to boost household income and consumption, allowing companies raise prices.

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

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

But the inflation forecast for fiscal 2023 remained at 1.6%, a sign that the board is sticking with the view that prices will moderate as the effect of earlier increases in costs of manufacturing wear off. raw materials.

The BOJ also cut its economic growth projections for fiscal years 2023 and 2024, amid concerns that slowing global growth will weigh on the export-dependent economy.

Japan’s core consumer inflation has exceeded the BOJ’s 2% target for eight consecutive months as companies raised prices to pass higher commodity costs on to households.

Data due to be released on Friday is likely to show inflation hit a new 41-year high of 4.0% in December, according to a Reuters poll, though analysts expect price growth to moderate by the end of this year due to recent declines in world commodity prices.

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

Our standards: Thomson Reuters Trust Principles.

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