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The BOJ defies market bets to adjust policy, sending the yen lower

  • BOJ keeps interest rate targets, yield range intact
  • The BOJ reinforces the market management tool, signaling the status quo on the ICC
  • The board raises inflation forecasts, but cuts growth projections

TOKYO, Jan 18 (Reuters) – The Bank of Japan kept interest rates ultra-low on Wednesday, including a cap on bond yields it has struggled to defend, defying market expectations that it will gradually wind down its massive stimulus program amid mounting inflationary pressures.

The surprise decision sent the yen tumbling against other currencies and bond yields to the most in decades, as investors reversed bets they had made expecting the central bank to revise its yield control policy.

Instead of revising its stimulus program, the BOJ built a new weapon to prevent long-term rates from rising too much – a move some analysts saw as a sign that Governor Haruhiko Kuroda would back off on major policy changes during his term that ends in April.

At the two-day policy meeting, the BOJ kept intact its yield curve control (ICC) targets, set at -0.1% for short-term interest rates and around 0% for the 10-year yield, unanimously.

The central bank also did not change its guidance that allows the 10-year bond yield to move 50 basis points either side of its 0% target.

Underscoring its determination to continue to defend the ceiling, the BOJ strengthened a key market tool to more effectively contain the rise in long-term interest rates.

“Widning the yield band or dismantling the ICC now would make the BOJ even more vulnerable to market attacks,” said Izuru Kato, chief economist at Totan Research.

“Showing its determination to use market tools more flexibly, the BOJ wanted to signal to markets that it would not make major changes to monetary policy under Kuroda.

Kuroda’s last policy meeting will be held on March 9 and 10, ending a decade at the helm of the bank that brought in radical monetary stimulus.

The decision follows a surprise move by the BOJ last month to double the yield band, a tweak that analysts say failed to correct market disruptions caused by heavy bond purchases.

The dollar rose 2.4% to 131.20 yen <ЈПИ=ЕБС> on the BOJ’s announcement, its biggest one-day jump since March 2020, while the Nikkei stock average jumped more than 600 yen.

Japanese government bond (JGB) yields fell across the curve with the benchmark 10-year yield at 0.37%, well below the BOJ’s 0.5% ceiling and at one point posted the biggest one-day drop since November 2003.

Reuters Graphics

DECREASING PROSPECTS FOR GROWTH

Since the December action, the BOJ has faced the biggest test of its ICC policy since its introduction in 2016 as rising inflation and the prospect of higher wages gave traders an excuse to attack the central bank’s yield ceiling with aggressive bond selling.

Kuroda has repeatedly said the BOJ is in no rush to withdraw stimulus, let alone raise interest rates, until wages rise enough to boost household incomes and spending, allowing firms to raise prices.

In a quarterly report released on Wednesday, the BOJ raised its forecast for core consumer inflation for the current fiscal year ending in March to 3.0%, from 2.9% projected in October.

It also revised its inflation forecast for the fiscal year ending March 2024 to 1.8%, from 1.6% three months ago.

However, the inflation forecast for fiscal 2023 was held at 1.6%, a sign that the board is sticking to the view that prices will moderate as the effect of earlier spikes in raw material costs dissipates.

Core CPI in Tokyo at new 40-year high

The BOJ also cut its economic growth projections for fiscal years 2023 and 2024, amid concerns that slowing global growth will weigh on the export-reliant economy.

Core consumer inflation in Japan has exceeded the BOJ’s 2% target for eight months in a row, as companies raised prices to pass on higher raw material costs to households.

Data due on Friday is likely to show inflation hit a new 41-year high of 4.0 percent in December, according to a Reuters poll, although analysts expect price gains to moderate later this year, reflecting recent falls in global prices. goods.

Reporting by Leiko Kihara and Tetsushi Kajimoto; Additional reporting by Kantaro Komia and Daniel Leussink; Editing by Bradley Perrett and Sam Holmes

Our Standards: Thomson Reuters Trust Principles.

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