Bank of Japan keeps yield curve tight despite market pressure

The Bank of Japan defied market pressure by leaving its yield curve control measures unchanged, sending the yen diving and lifting stocks as it stuck to the mainstay of its ultra-loose monetary policy.

Traders in Tokyo said BoJThe decision, which came after a two-day meeting, the last under its long-serving governor Haruhiko Kuroda, could pile more pressure on his successor to end Japan’s two-decade experiment in massive deflation. On Wednesday, Kuroda insisted his plan was a success, saying yield controls were stable.

A decision was then taken Weeks of turmoil Yields rose in the Japanese government bond market. The central bank last month bought bonds equivalent to about 6 percent of Japan’s GDP to try to keep yields within its target range.

The yield on 10-year Japanese government bonds fell as much as 0.15 percentage points following the announcement. Japan’s TOPICS stock index rose 1.7 percent.

Although currency markets have avoided the volatility that has gripped trading JGBsThe yen fell more than 2 percent against the dollar after the BoJ’s announcement.

Benjamin Shudle, a currency strategist at JP Morgan in Tokyo, said it was difficult to explain. YenWednesday’s fall was a reversal, with markets assuming the BoJ would eventually yield to pressure.

“In some ways today’s decision to make no changes — to policy or forward guidance — sets the BoJ up for a protracted battle with the market,” Shudle said.

of the BoJ An unexpected result in December The move to allow a higher target yield ceiling on 10-year government debt — allowing the yield to fluctuate by 0.5 percentage points above or below its target of zero — raised the possibility of the last of the world’s leading central banks still clinging to historical significance. Very loose monetary regime.

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Removing the cap on yields would raise interest rates, at least for long-term government debt.

Instead, the central bank on Wednesday left its yield curve control (YCC) policy unchanged, sticking to the range set last month. It kept overnight interest rates at minus 0.1 percent.

The BoJ also said it would extend the duration of funding measures to financial institutions, a move aimed at stabilizing the JGB yield curve.

Kuroda will step down later in April A record 10 years as BoJ GovernorThe YCC said last month that the changes in limits were to improve bond market activity and not an “exit strategy”.

On Wednesday, Kuroda stressed that the latest YCC amendment will take longer to play out. “We believe that market activity will improve in the future,” he said. “YCC is stable enough.”

Since its last policy meeting on December 20, the BoJ has spent about ¥34tn ($265bn) buying bonds, with the yield on 10-year bonds steadily rising above 0.5 percent. This prompted markets to pressure the central bank to abandon the yield target altogether.

“The Kuroda bazooka is over and now the new governor is turning things around and starting fresh,” said Mari Iwashita, chief market economist at Daiwa Securities. Before the policy meeting, Iwashita had said that the YCC structure was “at a terminal stage”.

Citigroup, which had expected the BoJ to remove the YCC this week, said a decision would now be made during the new governor’s first meeting in April. Fumio Kishida, Japan’s prime minister, is expected to announce Kuroda’s successor in a few weeks.

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“The problems with the YCC are so obvious that there is no need to discuss its side effects under the new governor,” said Citigroup economist Kiichi Murashima.

The central bank on Wednesday raised its inflation outlook for the fiscal year ending in March, with Japan’s core inflation, which excludes volatile fresh food prices, coming in at 3 percent instead of 2.9 percent previously forecast. It expects inflation of 1.8 percent in fiscal 2024 instead of 1.6 percent.

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

Although inflation in Japan is still moderate compared to the US and Europe, price rises have picked up pace, prompting investors to challenge Kuroda’s assertion that the central bank does not plan to raise interest rates.

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

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