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Bank of Japan defies market pressure and remains firmly in control of the yield curve

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The Bank of Japan defied market pressure and left its yield curve control measures unchanged, sending the yen lower and pushing equities higher as it maintained a central pillar 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, is likely to increase pressure on his successor to end Japan’s two-decade experiment in massive monetary easing. .

The decision comes after weeks of turmoil in the Japanese government bond market, during which yields soared. The central bank spent the equivalent of about 6% of Japan’s gross domestic product last month buying bonds to try to keep yields within its target range.

While currency markets avoided the turmoil that plagued JGB trading, the yen was down more than 2% against the dollar following the BoJ’s announcement.

Benjamin Shatil, a currency strategist at JPMorgan in Tokyo, said it was difficult to interpret Wednesday’s yen drop as a turning point, with markets assuming the BoJ will eventually have to buckle under the pressure.

“In a sense, the decision not to make changes today – neither in policy nor in future direction – sets the BoJ up for a prolonged battle with the market,” Shatil said.

Japan’s Topix stock market index rose 1.6 percent in afternoon trade, while the yield on Japanese 10-year government bonds fell 0.12 percentage points to 0.381 percent.

The BoJ’s unexpected decision in December to allow a higher yield cap on 10-year government debt – allowing yields to fluctuate 0.5 percentage points above or below its target of zero – raised the possibility of a historic pivot in the last of the largest major central banks still adhere to an ultra-loose monetary regime.

But rather than abandon its yield curve control (YCC) policy, the central bank made no further changes on Wednesday, sticking to the range set last month. It kept overnight interest rates at -0.1 percent.

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

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

“The Kuroda bazooka is over and now it’s up to the new governor to turn things around and start from scratch,” said Mari Iwashita, chief market economist at Daiwa Securities. Before the policy meeting, Iwashita had said that the YCC structure was in “a terminal condition”.

“This pace of bond buying is not sustainable,” Iwashita said ahead of the policy meeting. “Clearly, we are seeing the limits of YCC in the face of rising yields. It is now terminally ill.”

Fumio Kishida, Japan’s prime minister, is expected to name Kuroda’s successor within weeks.

The central bank also on Wednesday raised its inflation outlook for the fiscal year ending in March, projecting Japan’s core inflation, which does not include volatile fresh food prices, to be 3%, instead of 2, 9% predicted earlier. It also now expects inflation of 1.8% in fiscal 2024, instead of 1.6%.

Japan’s consumer price index rose 3.7% in November, its fastest pace in nearly 41 years and above the BoJ’s 2% target for the eighth consecutive month.

While inflation is still mild in Japan compared with the US and Europe, price increases have gathered pace, prompting investors to dispute Kuroda’s assertion that the central bank did not plan to raise interest rates.