Bank Of Japan Update

On Wednesday, the yen's value dropped significantly after the Bank of Japan (BOJ) chose to continue its quantitative easing monetary policy, despite market predictions that increasing inflation could lead the central bank to shift away from low-interest rates. After its two-day policy meeting, the BOJ maintained its yield curve control targets, leaving the short-term interest rate at a highly accommodative minus 0.1% and the 10-year Japanese Government Bonds yield at around 0%. The BOJ's yield curve control policy is a critical component of its strategy to keep interest rates low and stimulate economic growth.

BOJ's decision to strengthen its primary market operation tool is expected to help control increases in long-term interest rates and emphasizes its determination to maintain the cap. The move will also help in avoiding market attacks.

Izuru Kato, the chief economist at Totan Research, said

“Widening the yield band or dismantling YCC now would have made the BOJ even more vulnerable to market attack.” He added, “By showing its resolve to use market tools more flexibly, the BOJ wanted to signal it will not make big monetary policy changes under Kuroda.”

The BOJ's decision on Wednesday follows its unexpected move last month to double the yield band, a change that analysts say has yet to be successful in correcting the market distortions caused by its heavy bond buying. The BOJ's also reduced its forecast for economic growth for the next two fiscal years due to concerns that slowing global demand will negatively impact the export-dependent economy.

Despite this, BOJ Governor Haruhiko Kuroda stated that the BOJ predicts wages will increase as corporate profits are at an all-time high. The economy is expected to expand above its potential for three consecutive years.

It is worth noting that Japan's core consumer inflation has exceeded the BOJ's 2% target for eight consecutive months, as companies have raised prices to pass on the increased costs of raw materials to households.