- BOJ sticks to rate targets, yield range intact
- BOJ expands market operation tool and signals status quo on YCC
- The board raises inflation forecasts but cuts growth forecasts
TOKYO, Jan 18 (Portal) – The Bank of Japan on Wednesday maintained ultra-low interest rates, including a cap on bond yields it was struggling to defend, defying market expectations that it would end its massive stimulus package amid the rising inflationary pressures.
The surprise decision caused the yen to slide against other currencies as investors unwound bets they had placed on expectations that the central bank would revise its yield control policy.
At a two-day policy meeting, the BOJ maintained its yield curve control (YCC) targets at -0.1% for short-term interest rates and around 0% for the 10-year yield by unanimous vote.
The central bank also did not change its forecast that the 10-year bond yield could move 50 basis points either side of its 0% target.
In a sign of its determination to further defend the ceiling, the BOJ has upgraded a key market operations tool to more effectively contain the rise in long-term interest rates.
“Widening out the yield range or scaling down YCC at this point would have made the BOJ even more vulnerable to market attacks,” said Izuru Kato, chief economist at Totan Research.
“By demonstrating its determination to use market tools more flexibly, the BOJ wanted to signal to the markets that it will not make any major policy changes 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 yield spreads, a change analysts say has failed to correct market distortions caused by its heavy bond buying.
The dollar rose 2.4% to 131.20 yen after the BOJ announcement
The yield on the 10-year Japanese government bond fell 10.5 basis points to 0.395%.
Portal graphics
WEAKER GROWTH PROSPECTS
Since December’s action, the BOJ has faced the biggest test of its YCC policy since its inception in 2016, as rising inflation and the prospect of higher wages gave traders an excuse to attack the central bank’s yield cap with aggressive bond selling.
Kuroda has repeatedly said the BOJ is in no hurry to scale back stimulus, let alone raise interest rates, until wages rise enough to boost household incomes and consumption and allow businesses to raise prices.
In a quarterly report released on Wednesday, the BOJ raised its core inflation forecast for the current fiscal year, which ends in March, to 3.0% from 2.9% in October.
Also, the inflation forecast for the fiscal year ending March 2024 has been revised upwards to 1.8% from 1.6% three months ago.
However, the inflation forecast for fiscal 2023 was kept at 1.6%, a sign that the board is sticking to the view that prices will weaken as the impact of past increases in commodity costs fades.
The BOJ also lowered its economic growth forecasts for fiscal 2023 and 2024 amid fears that the slowdown in global growth will weigh on the export-dependent economy.
Japan’s core consumer inflation has exceeded the BOJ’s 2% target for eight straight months as companies have hiked prices to pass higher commodity costs on to households.
Data due on Friday is likely to show inflation hit a fresh 41-year high of 4.0% in December, according to a Portal poll, although analysts expect price growth to moderate later this year, reflecting recent reflecting decline in global commodity prices.
Reporting by Leika Kihara and Tetsushi Kajimoto; Additional reporting by Kantaro Komiya and Daniel Leussink; Edited by Bradley Perrett and Sam Holmes
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