Bank of Japan defies market pressure and firmly maintains yield curve control

The Bank of Japan defied market pressure and left its yield curve control measures unchanged, sending the yen plunging and pushing stocks higher as it stuck to a central pillar of its monetary policy ultra-accommodating.

Tokyo traders said the BoJ’s decision, which came after a two-day meeting the penultimate under its longest-serving governor, Haruhiko Kuroda, was likely to put more pressure on his successor to end Japan’s two-decade experiment of massive monetary easing.

The move follows weeks of turbulence in the Japanese government bond market during which yields surged. The central bank has spent the equivalent of about 6% of Japan’s gross domestic product over the past month buying bonds to keep yields within its target range.

Although forex markets avoided the turmoil that gripped JGB trading, the yen fell more than 2% against the dollar after the BoJ announcement.

Benjamin Shatil, currency strategist at JPMorgan in Tokyo, said it was difficult to interpret the yen’s decline on Wednesday as an inflection, with markets assuming the BoJ would eventually bow to pressure.

“In a way, the decision not to make any changes today — neither to policy nor to forward guidance — sets the BoJ up for a protracted battle with the market,” Shatil said.

Japan’s Topix stock index rose 1.6% in afternoon trading, while the yield on Japanese 10-year government bonds fell 0.12 percentage points to 0.381%.

The BoJ’s unexpected decision in December to allow a higher target yield cap on 10-year government debt – allowing yields to fluctuate 0.5 percentage points above or below its target of zero – had raised the possibility of a historic pivot when the last of the major central banks still stick to an ultra-loose monetary regime.

But instead of abandoning its yield curve control (YCC) policy, the central bank made no further changes on Wednesday, sticking to the range set last month. He kept overnight interest rates at minus 0.1%.

Kuroda, who will step down in April after a record 10 years as BoJ governor, said last month that the YCC limit changes were aimed at improving the functioning of the bond market and were not a “strategy Release”.

Since its last policy meeting on Dec. 20, the BoJ has spent about 34 trillion yen ($265 billion) on bond purchases, with 10-year bond yields continuing to climb above 0.5%. This prompted markets to pressure the central bank to abandon the yield target altogether.

“Kuroda’s bazooka is over and now it’s really up to the new governor to turn things around and start fresh,” said Mari Iwashita, chief market economist at Daiwa Securities. Prior to the political meeting, Iwashita said the YCC cadre was in “a terminal state”.

“This pace of bond buying is not sustainable,” Iwashita said ahead of the policy meeting. “We clearly see the limitations of YCC in the face of rising yields. It is now in a terminal state.

Fumio Kishida, the Japanese prime minister, is expected to name Kuroda’s successor within weeks.

The central bank also raised its inflation outlook for the fiscal year ending in March on Wednesday, predicting that Japan’s core inflation, which does not include volatile fresh food prices, would be 3% instead. of 2.9% previously forecast. He now also expects inflation to be 1.8% in fiscal 2024, down from 1.6%.

Japan’s consumer price index rose 3.7% in November, its fastest pace in nearly 41 years and above the BoJ’s 2% target for the eighth consecutive month.

Although inflation is still subdued in Japan compared to the United States and Europe, price increases have accelerated, prompting investors to dispute Kuroda’s claim that the central bank had not planned to raise interest rates.

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