The yen plunged 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 away from low interest rates. .
The BOJ kept its yield curve control (YCC) targets unchanged at the end of a two-day policy meeting on Wednesday. It left the short-term interest rate at an ultra-dovish level of minus 0.1% and the 10-year Japanese government bond (JGB) yield around 0%.
The YCC policy is a pillar of the central bank’s efforts to keep interest rates low and stimulate the economy.
The surprise move sent the yen plummeting. It briefly fell 2.7% against the US dollar around noon. It then pared some losses, last trading down 1.3% at 129.76 yen to the dollar. Last Friday, the currency hit a seven-month high of 127.46 against the greenback.
“Japan’s economy, although affected by factors such as high commodity prices, has recovered as the recovery in economic activity has progressed while public health has been shielded from Covid-19. 19,” the central bank said. said in its quarterly outlook report, adding that slowing foreign economies could put downward pressure on growth.
BOJ Governor Haruhiko Kuroda explained the decision at a press conference.
“Uncertainty about the Japanese economy is very high. It is necessary to support the economy with our recovery policy, to ensure that businesses can raise wages“, Kuroda said in comments published by Reuters. “By maintaining an ultra-easy policy, we will strive to achieve our price target in a stable and sustainable way accompanied by wage increases.”
Kuroda expects core consumer inflation to slow below 2% towards the second half of fiscal 2023.
Kuroda is due to step down in April after a decade in power.
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, in a move that has fueled speculation, the central bank could be heading in the same direction as others great savings by allowing rates to increase further.
The unexpected hawkish move sent stocks tumbling, while pushing the yen and bond yields higher.
Kuroda said there was no need to widen the yield band further after the December move.
“It hasn’t been long since we decided on our measures in December. It will probably take a little longer for the measures to start having an effect on the functioning of the market. With our flexible market operations, however, we expect market function to improve in the future,” he said, according to Reuters. “YCC is therefore likely to be sustainable.”