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BOJ defies market bets for policy tweaks, sending yen tumbling

  • BOJ keeps interest rate targets and yield band intact
  • BOJ Accelerates Market Mining Tool, Signals Status Quo on YCC
  • Board raises inflation forecast but cuts growth forecast

TOKYO, Jan 18 (Reuters) – The Bank of Japan kept interest rates rock-bottom on Wednesday, including a bond yield cap it struggled to defend, defying market expectations that it would phase out its massive stimulus program following mounting inflationary pressures. .

The surprise move sent the yen skidding against other currencies and bond yields fell the most in decades as investors canceled bets they had made in anticipation that the central bank would revise its yield control policy. .

Instead of revising its stimulus package, the BOJ has devised a new weapon to keep long-term rates from rising too much – a move some analysts took as a sign that Governor Haruhiko Kuroda will refrain from making big moves. policy changes during his term which ends in April.

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

The central bank also left its forecast unchanged, which allows the 10-year bond yield to move 50 basis points either side of its 0% target.

Underscoring its determination to continue to defend the cap, the BOJ has reinforced a key market tool to more effectively curb increases in long-term interest rates.

“Widening the yield range or breaking up YCC now would have made the BOJ even more vulnerable to market attack,” said Izuru Kato, chief economist at Totan Research.

“By showing its determination to use market tools more flexibly, the BOJ wanted to signal to markets that it will not be making major monetary policy changes under Kuroda.”

Kuroda’s final policy meeting will be March 9-10, ending a decade at the helm of the bank that prompted sweeping monetary stimulus.

The move follows the BOJ’s surprise move last month to double the yield range, an adjustment that analysts said failed to correct market distortions caused by its massive bond buying.

The dollar rose 2.4% to 131.20 yen during the BOJ announcement, marking its biggest one-day jump since March 2020, while average Nikkei shares jumped over 600 yen.

Japanese government bond (JGB) yields fell on the curve, with the benchmark 10-year yield slipping to 0.37%, well below the BOJ’s 0.5% cap and posting the biggest drop on a day since November 2003 at some point.

Reuters Charts

SERIOUS GROWTH PROSPECTS

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

Kuroda has repeatedly said that the BOJ is in no rush to call back the stimulus, let alone raise interest rates, until wages rise enough to boost household incomes and consumption, allowing firms to raise prices.

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

It also revised up the inflation forecast for the fiscal year ending March 2024 to 1.8%, from 1.6% three months ago.

But the inflation forecast for FY2023 has been kept at 1.6%, a sign the board is sticking to the idea that prices will moderate as the effect of past surges wears off. raw material costs will dissipate.

Tokyo core CPI hits new 40-year high

The BOJ also cut its economic growth projections for fiscal 2023 and 2024, as slowing global growth will weigh on the export-dependent economy.

Core consumer inflation in Japan has exceeded the BOJ’s 2% target for eight consecutive months as companies raised prices to pass on higher commodity costs to households.

Data due out on Friday is expected to show inflation hit a new 41-year high of 4.0% in December, according to a Reuters poll, although analysts expect price growth to slow further. later this year, reflecting the recent decline in global commodity prices.

Reporting by Leika Kihara and Tetsushi Kajimoto; Additional reporting by Kantaro Komiya and Daniel Leussink; Editing by Bradley Perrett and Sam Holmes

Our standards: The Thomson Reuters Trust Principles.

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