The Bank of Japan is defying market pressure and firmly sticking to yield curve control

The Bank of Japan defied market pressures and left its yield curve control measures unchanged, sending the yen down and pushing stocks higher as it stuck to the mainstay of its ultra-loose monetary policy.

Traders in Tokyo said the Bank of Japan’s decision, which came after a two-day meeting, the penultimate one under its longest-serving ruler, Haruhiko Kuroda, is likely to pressure his successor to end Japan’s two-decade experiment in massive monetary easing.

Resolution follows weeks of turmoil In the Japanese government bond market, during which yields rose. The central bank has used the equivalent of about 6 percent of Japan’s GDP over the past month to buy bonds to try to keep yields within its target range.

Although the currency markets have avoided the turmoil that swept trading in them JGBsThe yen fell more than 2 percent against the dollar after the Bank of Japan’s announcement.

It was difficult to interpret the yen’s decline on Wednesday as a reversal, said Benjamin Chatel, a currency analyst at JPMorgan in Tokyo, as markets assume that BoJ You will eventually have to back off the pressure.

“In some ways, the decision not to make any changes today — neither to policy nor guidance guidance — puts the Bank of Japan into a longer-term confrontation with the market,” Chatel said.

The Japanese Stock Market Index Topix rose 1.6 percent in afternoon trading, while the yield on 10-year Japanese government bonds fell 0.12 percentage points to 0.381 percent.

Bank of Japan An unexpected decision in December To allow an upper cap on the target yield on 10-year government debt — allowing yields to fluctuate 0.5 percentage points above or below its target target of zero — has raised the possibility of a historic pivot by the world’s last leading central banks still committed to a loose monetary system. Extremely.

But rather than scrapping its policy of yield curve control (YCC), the central bank made no further changes on Wednesday, sticking to 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 changes to the BoJ’s limits are intended to improve the performance of the bond market and are not an “exit strategy.”

Since its last policy meeting on Dec. 20, the Bank of Japan has spent about 34 trillion yen ($265 billion) on bond purchases, with yields on the 10-year note still rising above 0.5 percent. This prompted the markets to pressure the central bank to abandon the yield target altogether.

“The era of the Bazooka Kuroda is over and now it’s really up to the new ruler to turn things around 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 “final state.”

“This pace of bond buying is not sustainable,” Iwashita said before the policy meeting. “We clearly see the limitations of YCC in the face of rising returns. It is now in a terminal state.”

Fumio Kishida, the Prime Minister of Japan, is due to name Kuroda’s successor within weeks.

The central bank also on Wednesday raised its inflation forecast for the fiscal year ending in March, expecting Japan’s core inflation, which excludes volatile fresh food prices, to come in at 3 percent instead of the previous forecast of 2.9 percent. It also now 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 Bank of Japan’s 2 percent target for the eighth consecutive month.

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

Leave a Comment