The Bank of Japan has defied market pressure and left yield curve control measures unchanged, sending them diving and pushing stocks higher as they stuck to the core pillars of ultra-loose monetary policy.
Traders in Tokyo said the BoJ’s decision, which came after a two-day meeting, the last under its longest-serving governor, Haruhiko Kuroda, is likely to increase pressure on his successor to end Japan’s two-decade experiment in massive monetary easing.
The decision followed weeks of turmoil in Japan’s government bond market as yields rose. The central bank deployed about 6 percent of Japan’s gross domestic product over the past month to buy bonds to try to hold yields within a range of targets.
Although the currency market has avoided the turbulence that has gripped trading in JGBs, it fell more than 2 percent against the dollar after the announcement of the BoJ.
Benjamin Shatil, currency strategist at JPMorgan in Tokyo, said it was difficult to interpret Wednesday’s decline as an inflection, with markets assuming the BoJ would finally have to give in to pressure.
“In some ways, the decision not to make changes today – neither to policy nor to continue guidance – sets the BoJ up for a protracted battle with the market,” said Shatil.
Japan’s Topix stock market index was 1.6 percent higher in afternoon trade, while the yield on Japan’s 10-year government bond fell 0.12 percentage points to 0.381 percent.
The BoJ’s unexpected decision in December to allow a higher target yield ceiling on 10-year government debt – allowing yields to fluctuate by 0.5 percentage points above or below the zero target – has raised the possibility of a historic pivot at the end of the world. The leading central banks still remain in the ultra-loose monetary regime.
But instead of removing the yield curve control (YCC) policy, the central bank made no further changes on Wednesday, staying within the range set last month. It kept the overnight interest rate at minus 0.1 percent.
Kuroda, who will step down in April after a record 10 years as BoJ governor, said last month that the change in YCC limits was intended to improve the functioning of the bond market and not an “exit strategy”.
Since its last policy meeting on December 20, the BoJ has spent about ¥34tn ($265bn) on bond purchases, with the 10-year bond yield steadily rising above 0.5 percent. That caused the market to put pressure on the central bank to abandon the yield target altogether.
“Kuroda’s bazooka is over and now it’s up to the new governor to replace it and start from scratch,” said Mari Iwashita, chief market economist at Daiwa Securities. Before the policy meeting, Iwashita said the YCC framework was in a “terminal condition”.
“This pace of bond buying is unsustainable,” Iwashita said before the policy meeting. “It is clear that we are seeing the limits of YCC when it comes to increasing yields. It is now terminal.”
Fumio Kishida, Japan’s prime minister, is expected to name Kuroda’s successor within weeks.
The central bank on Wednesday also raised its inflation outlook for the fiscal year ending in March, projecting Japan’s core inflation, which excludes volatile fresh food prices, to 3 percent from a previous forecast of 2.9 percent. It also now expects inflation to be 1.8 percent in fiscal year 2024, instead of 1.6 percent.
Japan’s consumer price index rose 3.7 percent in November, the fastest pace in nearly 41 years and above the BoJ’s 2 percent target for the eighth consecutive month.
Although inflation is still mild in Japan compared to the US and Europe, price increases have gained pace, prompting investors to challenge Kuroda’s statement that the central bank does not plan to raise interest rates.