The Bank of Japan is defying market pressure and holding tight to yield curve control

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

Traders in Tokyo said the BoJ’s decision, which came after a two-day meeting, the penultimate under its longest-serving governor Haruhiko Kuroda, was likely to put more pressure on his successor to end Japan’s two-decade experiment in massive monetary easing. Kuroda insisted on Wednesday that his program had been successful, saying yield control was sustainable.

The decision followed weeks of turmoil in the Japanese government bond market during which yields rose. The central bank spent the equivalent of about 6 percent of Japan’s gross domestic product over the past month on bond purchases to try to keep yields within a target range.

The yield on Japan’s 10-year government bond fell as much as 0.15 percentage points after the announcement, before returning to fall 0.9 percentage points to 0.405 percent. Japan’s Topik stock index rose 1.7 percent.

Although currency markets avoided the turbulence that engulfed JGB trading, the yen fell more than 2 percent against the dollar after the BoJ announcement.

Benjamin Shatill, currency strategist at JPMorgan in Tokyo, said it was difficult to interpret the yen’s decline on Wednesday as a reversal, given that markets assumed the BoJ would eventually have to ease under pressure.

“In some ways the decision to make no changes today — neither to policy nor to forward guidance — sets the BoJ up for a protracted battle with the market,” Shatill said.

The BoJ’s surprise decision in December to allow a higher target yield limit on 10-year government debt — allowing yields to fluctuate 0.5 percentage points above or below the zero target — raised the possibility of a historic reversal to the world’s last debt. leading central banks that continue to adhere to an ultra-loose monetary regime.

But instead of lifting its yield curve control (ICC) policy, the central bank made no further changes on Wednesday, sticking to the range set last month. It kept overnight interest rates at minus 0.1 percent.

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

Kuroda, who will step down in April after a record 10 years as BoJ governor, said last month that the changes to the ICC limits were intended to improve the functioning of the bond market and were not an “exit strategy”.

Kuroda stressed Wednesday that it will take more time for OKC’s recent overhaul to play out. “We believe that the functioning of the market will improve in the future,” he said. “The ICC is sustainable enough.”

Since its last policy meeting on Dec. 20, the BoJ has spent about 34 trillion yen ($265 billion) on bond purchases, with yields on 10-year bonds continuing to rise above 0.5 percent. That prompted markets to pressure the central bank to abandon its yield target altogether.

“Bazooka Kuroda is over and now it’s really up to the new governor to turn things around and start from scratch,” said Marie Iwashita, chief market economist at Daiva Securities. Before the policy meeting, Iwashita said the ICC’s framework was in a “dead end.”

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

“The problems with the ICC are pretty explicit, so there’s not much need to discuss its side effects under the new governor,” said Citigroup economist Kiichi Murashima.

The central bank also raised its inflation outlook for the fiscal year ending in March on Wednesday, forecasting Japan’s core inflation, which excludes volatile fresh food prices, to be 3 percent instead of the 2.9 percent previously forecast. It now also expects inflation to be 1.8 percent in fiscal 2024, up from 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 remains mild compared to the US and Europe, price growth has accelerated, prompting investors to dispute Kuroda’s claim that the central bank had no plans to raise interest rates.

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

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