Hong Kong CNN —
The yen tumbled on Wednesday after the Bank of Japan decided to maintain its ultra-loose monetary policy, defying market expectations that rising inflation could force the central bank to move away from low interest rates.
The BOJ left its Yield Curve Control (YCC) targets unchanged as it concluded a two-day policy meeting on Wednesday. It left the short term interest rate at an ultra dovish minus 0.1% and the 10-year Japanese government bond (JGB) yield at around 0%.
YCC policy is a pillar of the central bank’s efforts to keep interest rates low and stimulate the economy.
The surprising decision sent the yen down. Around midday, it briefly fell 2.7% against the US dollar. It later pared some losses and was last trading 1.3% lower at 129.76 yen per dollar. Last Friday, the currency hit a seven-month high of 127.46 against the greenback.
“Japan’s economy has recovered despite being hit by factors such as high commodity prices as the resumption of economic activity progressed while public health was protected from Covid-19,” the central bank said in its quarterly forecast report, adding slowdowns in overseas economies could occur put pressure on growth.
BOJ Governor Haruhiko Kuroda explained the decision at a press conference.
“Uncertainty about the Japanese economy is very high. Supporting the economy with our stimulus policies is necessary to ensure companies can raise wages,” Kuroda said in a commentary published by Portal. “By maintaining an ultra-light policy, we will achieve our price target in a stable and sustainable manner, accompanied by wage increases.”
kuroda expects core consumer inflation to slow below 2% in the second half of fiscal 2023.
Kuroda will step down in April after a decade in office.
Last month, the BOJ shocked global markets by allowing the 10-year JGB yield to move 50 basis points either side of its 0% target, a move that fueled speculation that the central bank was heading in the same direction as others could hit major economies by allowing prices to continue to rise.
The unexpectedly hawkish decision sent stocks tumbling while the yen and bond yields soared.
Kuroda said there was no need to further widen the yield range after the move in December.
“It is not long since we decided on our measures in December. It will probably take some time before the measures taken to determine the market function have an impact. However, with our flexible market operations, we expect market functioning to improve in the future,” he said, according to Portal. “YCC is therefore likely to be sustainable.”