By Leika Kihara and Tetsushi Kajimoto
TOKYO (RockedBuzz via Reuters) – The Bank of Japan kept interest rates ultra-low on Wednesday, including a 0.5% cap on the 10-year bond yield, defying market expectations it would phase out its massive stimulus program in the wake of rising inflationary pressure.
In a two-day policy meeting, the BOJ kept its yield curve control (YCC) targets intact, set at -0.1% for short-term interest rates and around 0% for the yield at 10 years, by unanimous vote.
The central bank also made no changes to its guidance that allows the 10-year bond yield to move 50 basis points either side of its 0% target.
The move follows the BOJ’s surprise move last month to double its yield band, a change that analysts say failed to correct market distortions caused by its heavy bond purchases.
Markets had anticipated a possible policy shift at the meeting. The decision to keep settings unchanged sent the dollar up nearly 2% against the yen, the largest one-day percentage increase since June 17.
“I’d rather they quit or do nothing,” said Christopher Wong, a currency strategist at OCBC in Singapore.
“With expectations rising, a negative move would disappoint JPY bulls and the weakness could return. But this is likely to be temporary.”
Market attention now shifts to the upcoming meeting in March, which will be the last one chaired by Governor Haruhiko Kuroda before his term ends in April, Wong said.
Chart: Japan’s core inflation hits new 40-year high
Since December’s action, the BOJ has faced the biggest test for the YCC since its introduction in 2016, as rising inflation and higher wage prospects have given traders an excuse to attack the bank’s yield cap central with an aggressive sale of bonds.
In a quarterly report released on Wednesday, the BOJ raised its core consumer inflation forecast for the current fiscal year ending in March to 3.0%, from 2.9% expected in October.
It also revised its inflation forecast for fiscal 2024 upwards to 1.8%, from 1.6% seen three months ago. The forecast for fiscal 2023 was maintained at a 1.6% increase.
Core consumer inflation in Japan has exceeded the BOJ’s 2% target for eight consecutive months, as companies raised prices to pass higher commodity costs onto households.
Data due Friday will likely show inflation hit a new 41-year high of 4.0% in December, according to a RockedBuzz via Reuters poll, although analysts expect price growth to moderate by the end of the year. , reflecting the recent decline in global commodity prices.
(Reporting by Leika Kihara and Tetsushi Kajimoto; Additional reporting by Kantaro Komiya and Daniel Leussink; Editing by Bradley Perrett and Sam Holmes)