TOKYO: The Bank of Japan on Wednesday (Jan 18) maintained ultra-low interest rates, including its 0.5 per cent cap for the 10-year bond yield, defying market expectations it would phase out its massive stimulus programme in the wake of rising inflationary pressure.
At a two-day policy meeting, the BOJ kept intact its yield curve control (YCC) targets, set at -0.1 per cent for short-term interest rates and around 0 per cent for the 10-year yield, by a unanimous vote.
The central bank also made no change to its guidance that allows the 10-year bond yield to move 50 basis points either side of its 0 per cent target.
The decision follows the BOJ's surprise move last month to double the yield band, a tweak that analysts say has failed to correct market distortions caused by its heavy bond buying.
Markets had anticipated a possible change to policy at the meeting and the surprise decision to keep settings unchanged sent the dollar surging nearly 2 per cent against the yen, its biggest one-day percentage jump since Jun 17.
"I rather they abandon, or don't do anything at all," said Christopher Wong, currency strategist at OCBC in Singapore.
"With expectations running high, a no move would disappoint JPY bulls and weakness can return. But this is likely to be temporary."
The market's focus now shifts to the next meeting in March, which will be the final one Governor Haruhiko Kuroda chairs before his term ends in April, Wong said.
"If the market is rather resilient and benevolent with Mr Kuroda, I think he will pass the baton to the next governor, and the next governor would have to rethink at least a path," said Dr Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis.
The reaction of the yen, which tumbled after the BOJ decided to keep its yield curve controls in place, "shows that this is kind of going to be hard to keep forever," Dr Garcia-Herrero told CNA's Asia Now.
"Somebody will have to do something about the yield curve at some point in Japan."
The central bank is "basically in the midst of a transition," she noted.
"It is hard for Mr Kuroda to move away from what he's been doing for so many years. But the reality is that the yield curve in Japan is crying for him to do so."
Since December's action, the BOJ has faced the biggest test to YCC since its introduction in 2016 as rising inflation and the prospects of higher wages gave traders an excuse to attack the central bank's yield cap with aggressive bond selling.
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 per cent, from 2.9 per cent projected in October.
It also revised up the inflation forecast for fiscal 2024 to 1.8 per cent, from 1.6 per cent seen three months ago. The forecast for fiscal 2023 was maintained at a 1.6 per cent increase.
Japan's core consumer inflation exceeded the BOJ's 2 per cent target for eight straight months, as companies raised prices to pass on higher raw material costs to households.
Data due out on Friday is likely to show inflation hit a fresh 41-year high of 4.0 per cent in December, according to a Reuters poll, although analysts expect price growth to moderate later this year reflecting recent declines in global commodity prices.