BoJ Confounds Market Expectations of Policy Tweaks

The Bank of Japan (BoJ) this week kept ultra-low interest rates intact, upsetting market projections that it would respond to rising inflationary pressure by erasing its stimulus program. The central bank also announced it would continue to cap bond yields.

The unexpected decision made the yen unstable against other currencies, while bond yields plunged in response to investors backtracking from bets they had placed on the BoJ undoing its yield-control policy. The dollar rose 2.4% to 131.20 yen, its biggest one-day jump since March 2020.

Rather than abandon its stimulus program, the BoJ introduced a new measure designed to ensure long-term rates did not climb too steeply, a sure sign that outgoing Governor Haruhiko Kuroda was not prepared to make any major changes before the end of his tenure in April.

At a BoJ policy meeting, policymakers unanimously pledged to maintain yield curve control targets of -0.1% for short-term interest rates and around 0% for the 10-year yield. The cap is designed to help discourage increases in long-term interest rates.

Governor Kuroda has been hesitant to remove stimulus measures until wages increase enough to boost household income and consumption, allowing firms to lift prices. Interest rates have, therefore, been suppressed.

The BoJ’s core consumer inflation forecast for the current fiscal year ending in March is 3.0%, marginally up from the 2.9% projected in October. It kept its overall inflation forecast for the same period at 1.6%, a sign that policymakers are sticking to the view that prices will moderate as the effect of past surges in raw material costs subside.