The Bank of Japan defied market pressures and left its yield curve controls unchanged, sending the yen sharply lower and equities higher as it maintained a key pillar of its ultra-loose monetary policy.
Traders in Tokyo said the decision, which came after a two-day meeting, the penultimate, under Haruhiko Kuroda, the BoJ’s longest-serving governor, would likely put even greater pressure on his successor to end Japan’s two-decade experiment in massive monetary policy to end relaxation.
The BoJ’s decision follows weeks of turmoil in the Japanese government bond market, during which yields rose sharply. The central bank used the equivalent of about 6 percent of Japan’s gross domestic product to buy bonds last month to try to keep yields within its target range.
Although FX markets have avoided the same turmoil that has gripped JGBs trading, the yen plunged nearly 2 percent against the dollar in the minutes following the BoJ’s announcement.
Benjamin Shatil, a currency strategist at JPMorgan in Tokyo, said it was difficult to interpret Wednesday’s move in the yen as a flex as markets anticipate the BoJ will eventually have to cave in to pressure.
“In a way, the decision not to make any changes today – either in policy or in forwarding guidance – prepares the BoJ for a protracted battle with the market,” Shatil said.
The Japanese stock market index Topix rose 1.2 percent in afternoon trade.
The BoJ’s unexpected decision in December to allow a higher target yield cap on 10-year Japanese government bonds raised the possibility of an historic turning point for the last of the world’s top central banks still clinging to ultra-loose monetary policy.
But instead of scrapping its yield curve control (YCC) policy, the central bank made no further changes on Wednesday and said it would continue to allow 10-year bond yields to fluctuate 0.5 percentage points above or below its zero target yield. She kept overnight rates at minus 0.1 percent.
Kuroda, who will step down in April after a record-breaking 10 years as BoJ governor, said last month that changes to YCC limits are meant to improve the functioning of bond markets and are not an “exit strategy”.
Since its last monetary policy meeting on Dec. 20, the BoJ has spent around 34 trillion yen ($265 billion) on asset purchases, with 10-year bond yields continuing to climb above 0.5 percent. This prompted markets to put pressure on the central bank to abandon the yield target altogether.
“The Kuroda bazooka is over, and now it’s really up to the new governor to change things up and start over,” said Mari Iwashita, chief market economist at Daiwa Securities. Before the policy meeting, Iwashita said the YCC framework was in “an incurable state.”
“This pace of bond purchases is unsustainable,” Iwashita said ahead of the policy meeting. “With yields rising, we clearly see the limits of the YCC. It is now in an incurable state.”
Fumio Kishida, Japan’s prime minister, will appoint Kuroda’s successor within weeks.
The central bank on Wednesday also raised its inflation outlook for the fiscal year ended March, forecasting Japan’s core inflation, which excludes volatile fresh food prices, at 3 percent instead of the 2.9 percent previously forecast. For the 2024 financial year, too, she is now anticipating inflation of 1.8 percent instead of 1.6 percent.
Japan’s consumer price index rose 3.7 percent in November, the fastest pace in nearly 41 years, beating the BoJ’s 2 percent target for the eighth straight month.
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Although inflation in Japan is still low compared to the US and Europe, price hikes have picked up steam, leading investors to question Kuroda’s claim that the central bank has no plans to raise interest rates.
Takeo Kamai, head of execution at CLSA in Tokyo, said futures trading after the BoJ’s announcement suggested stock markets would react positively to the news that Japanese companies had stayed away from monetary tightening for the time being.
Kamai said some investors may choose to take profits on bank stocks, which have risen sharply in recent weeks on expectations that Japan is heading towards monetary policy normalization.