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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 BoJJapan’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 the two-day experiment. decades of massive Japanese monetary easing. On Wednesday, Kuroda insisted his program had been successful, saying the performance checks were sustainable.

The decision followed weeks of turmoil 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.

The yield on 10-year Japanese government bonds fell 0.15 percentage points after the announcement, before falling back 0.09 percentage points to 0.405%. The Japanese Topix equity index rose 1.7%.

Although foreign exchange markets avoided the turbulence that paralyzed trade in JGBthe 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 yenWednesday as a turnaround, with markets assuming the BoJ will eventually bow to pressure.

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

The BoJs 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 zero target – had raised the possibility of a historic pivot of the last of the world’s major central banks that still sticks to an ultra-loose monetary regime.

Removing the yield cap would indeed raise interest rates, at least for longer-term government debt.

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

The BoJ said it would also extend the duration of its operations to provide funds to financial institutions, a move aimed at stabilizing the JGB yield curve.

Kuroda, who will step down in April after a 10-year record as BoJ Governorsaid last month that the YCC boundary changes were aimed at improving the functioning of the bond market and were not an “exit strategy”.

On Wednesday, Kuroda pointed out that it would take more time for the recent YCC overhaul to come to fruition. “We believe that the functioning of the market will improve in the future,” he said. “The YCC is durable enough.”

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 rise 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 economist at Daiwa Securities. Prior to the policy meeting, Iwashita said the YCC cadre was in “a terminal state”.

Citigroup, which expected the BoJ to drop YCC this week, said the decision would now likely be made at the new governor’s first meeting in April. Fumio Kishida, the Japanese prime minister, is expected to name Kuroda’s successor within weeks.

“The issues with YCC are pretty self-explanatory, so there’s really no need to debate its side effects under the new governor,” said Citigroup economist Kiichi Murashima.

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.

The BoJ also lowered Japan’s economic growth forecast for the next two fiscal years, citing a slowdown in other economies.

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