BOJ Defies Market Bets for Policy Tweaks, Yen Tumbles

By Reuters
January 18, 2023Updated: January 18, 2023

TOKYO—The Bank of Japan on Wednesday maintained ultra-low interest rates, including a bond yield cap it was struggling to defend, defying market expectations it would phase out its massive stimulus program amid mounting inflationary pressure.

The surprise decision sent the yen skidding against other currencies and bond yields tumbling the most in decades, as investors unwound bets they made anticipating the central bank would overhaul its yield control policy.

Instead of changing its stimulus program, the BOJ crafted a new weapon to prevent long-term rates from rising too much—a move some analysts took as a sign Governor Haruhiko Kuroda will hold off on making big policy shifts during the remaining months of his term, which ends in April.

At a two-day policy meeting, the BOJ kept intact its yield curve control (YCC) targets, set at -0.1 percent for short-term interest rates and around 0 percent for the 10-year yield, by a unanimous vote.

The central bank also made no change to its guidance that allows the 10-year bond yield to move 50 basis points either side of its 0 percent target.

“Uncertainty regarding Japan’s economy is very high. It’s necessary to support the economy with our stimulus policy, to ensure companies can raise wages,” Kuroda told a news conference after the meeting.

“By maintaining ultra-easy policy, we will strive to achieve our price target stably and sustainably accompanied by wage hikes,” he said.

The BOJ’s decision to beef up its key market operation tool will help curb rises in long-term interest rates but importantly underscores its dogged commitment to defend the cap.

“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 resolve to use market tools more flexibly, the BOJ wanted to signal to markets it won’t make big monetary policy changes under Kuroda.”

Kuroda’s last policy meeting will be held on March 9–10, ending a decade helming the bank, which brought about radical monetary stimulus but ultimately failed to meet its objective of sustainably reviving anemic consumer demand.

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

The dollar rose 2.4 percent to 131.20 yen on the BOJ’s announcement, marking its biggest one-day jump since March 2020, while the Nikkei stock average jumped 2.5 percent to 26,791.12, its highest close since Dec. 19.

Japanese government bond (JGB) yields tumbled across the curve with the benchmark 10-year yield sliding to 0.37 percent, well below the BOJ’s 0.5 percent ceiling and posting the biggest one-day decline since November 2003 at one point.

Gov. Haruhiko Kuroda
Bank of Japan Gov. Haruhiko Kuroda arrives for a meeting at the BOJ headquarters in Tokyo on Jan. 18, 2023. (Kyodo News via AP)

Dimming Growth Prospects

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

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

It also revised up the inflation forecast for the fiscal year ending March 2025 to 1.8 percent, from 1.6 percent seen three months ago.

But the inflation forecast for fiscal 2023 was maintained at 1.6 percent, a sign the board is sticking to the view prices will moderate as the effect of past surges in raw material costs dissipate.

The BOJ also slashed its economic growth projections for fiscal 2023 and 2024, amid worries slowing global growth will weigh on the export-reliant economy.

Japan’s core consumer inflation has exceeded the BOJ’s 2 percent target for eight straight months, as companies raised prices to pass on higher raw material costs to households.

Data due out on Friday is likely to show inflation hit a fresh 41-year high of 4.0 percent in December, according to a Reuters poll, although analysts expect price growth to moderate later this year reflecting recent declines in global commodity prices.

By Leika Kihara and Tetsushi Kajimoto