The Bank of Japan on Wednesday left its ultralow rate policy unchanged and Governor Haruhiko Kuroda shot down the prospect of changing its cap on long-term bond yields again, sending the yen and yields plunging.
Despite forecasting inflation to reach 3 percent, above its 2 percent target, the BOJ stuck to its yield curve control program at the end of a two-day policy meeting. The scheme is designed to keep short-term and long-term interest rates at rock-bottom levels to support the economy.
The 0.5 percent cap on 10-year Japanese government bond yields was retained in a push-back against market players who sold government bonds to test the tolerance of the nation's dovish central bank and challenge the recently altered limit.
Kuroda has categorically denied the link between last month's decision on raising the yield ceiling and a rate hike or any shift toward monetary tightening.
The governor, whose current term ends in April, said ultralow rates are still needed to prompt companies to raise wages and to spur stronger demand to support price increases.
"I don't see it necessary to widen the trading band," Kuroda told a post-meeting press conference, defying market pressure to do so.
The dollar jumped above the 131 yen line from the mid-128 yen range before the policy decision. The yield on the benchmark 10-year government bond briefly fell to 0.36 percent, having hit 0.51 percent earlier Wednesday.
Kuroda took no issue with the recent sharp increase in BOJ bond-buying that resulted from a policy tweak at the previous meeting of widening its target band for 10-year Japanese government bonds, adding that its rising share of Japanese government bond holdings does not pose a risk.
"Our bond-buying has been increasing, but that's the way it should be under YCC (yield curve control) because (buying) depends on market conditions. I don't think our increased purchases are problematic," Kuroda said.
The yen had regained strength against the U.S. dollar since the BOJ's surprise decision in December to allow 10-year yields to trade between minus 0.5 percent and 0.5 percent, wider than the previous band of minus 0.25 percent and 0.25 percent.
The recovery followed a sharp depreciation of the yen that bore the brunt of the BOJ's dovish stance, which contrasted sharply with aggressive rate hikes by the U.S. Federal Reserve to fight soaring inflation.
Many BOJ watchers had expected no change this time, even amid growing speculation the central bank would further expand the 10-year yield trade band, or scrap the yield curve control program, launched in 2016, altogether.
The BOJ said it expects short-term and long-term interest rates to stay "at their present or lower levels," maintaining its policy guidance.
Under its yield curve control program that Kuroda said is "sustainable," short-term interest rates are set at minus 0.1 percent while 10-year yields are guided around zero percent.
The Policy Board has stressed the need for more robust wage growth to see the 2 percent target attained stably, one of the reasons the BOJ persists with monetary easing.
"We are still not in a situation where we can expect the price stability target can be achieved in a sustainable and stable manner," Kuroda said. He has only one more scheduled policy meeting during his current term after a decade of powerful monetary easing.
In a fresh outlook report, the BOJ forecast core consumer prices excluding volatile fresh food items to rise 3 percent in the year to March 2023, up from its earlier projection of 2.9 percent. The key gauge of inflation will likely gain 1.6 percent in fiscal 2023 and then 1.8 percent, undershooting the 2 percent inflation target.
"Governor Kuroda will likely end his term with large-scale monetary easing in place, leaving the job of addressing its negative effects up to his successor," said Toru Suehiro, chief economist at Daiwa Securities Co.
"Market speculation that the BOJ will modify the yield curve control program or end the negative rate policy will persist because it is viewed as only deferring such decisions," Suehiro said, adding that the central bank's aggressive bond-buying may be nearing its limit.
The BOJ looks to be caught in a quagmire of its own making after its abrupt expansion of the trading band backfired.
The December move was intended by the BOJ, which holds about half of all government debt, to fix distortions in the bond market. But it instead forced the central bank to ramp up bond-buying to curb rising yields, in its desperate effort to quash speculation of a shift toward tighter monetary policy.
The BOJ also expanded its scheme to encourage commercial banks to buy government bonds by providing funds, which would help bring down yields without the central bank stepping up purchases.
Higher bond yields hurt households and businesses through a rise in loan interest rates at a time when the world's third-largest economy is lacking in vigor as it emerges from the COVID-19 pandemic. Quickening inflation, blamed on Russia's invasion of Ukraine and higher import costs, has been weighing on consumer sentiment.
The BOJ cut its outlook for economic growth to 1.9 percent in the current fiscal year from its earlier forecast of 2.0 percent. The projections for fiscal 2023 and 2024 were also downgraded.