The Japanese yen weakened in local trading on Tuesday after the Bank of Japan (BoJ) decided to maintain ultra-low interest rates while making a minor adjustment to its bond yield control policy.
The yen fell by 0.7 percent against the U.S. dollar, breaking through the 150-level to hit an intraday low of 150.12. The yen later recovered some of those losses to trade at 149.95 but then fell back to 150.20 as of writing.
The euro also rose by 0.69 percent against the yen after the decision, reaching a value of 159.38 yen.
According to analysts, the BoJ’s decision disappointed investors who had hoped for more aggressive action from the central bank to combat rising prices.
Minor tweaks to 10-year government bond yield
At the end of its two-day policy meeting, the BoJ announced that it would maintain its -0.1 percent target for short-term interest rates and 10-year government bond yield target at 0 percent under its yield curve control (YCC) policy. However, the BoJ also widened its tolerance band around the target, allowing the yield to fluctuate up to 1.0 percent.
The BoJ had doubled its yield cap from 0.5 percent to 1.0 percent in July due to rising global bond yields. The 10-year Japanese bond yield hit a decade-high of 0.955 percent just before Tuesday’s decision. While this tweak could reduce the BOJ’s need to buy bonds, it may also signal the end of YCC and negative interest rates.
“(The) BOJ will buy some bonds around that (1%) level but not unlimited, and they’ve shown their hand. Through all the linguistic contortions, the fact is that they are dismantling YCC,” said Tom Nash, portfolio manager at UBS Asset Management.
“A yield cap isn’t a yield cap if you change it every time the market gets close.”
In September, inflation in Japan exceeded the BoJ’s two percent target for the 18th straight month. Surveys show that inflation expectations are rising, which makes borrowing less expensive in real terms.
Despite Governor Ueda’s repeated assurances that ultra-low interest rates will remain in place, markets are already anticipating a policy shift early next year. Nearly two-thirds of economists surveyed by Reuters expect Japan to end negative interest rates in 2024.
Japan’s central bank raised price forecasts, expecting core inflation — excluding food — to reach 2.8 percent in 2024 from 2.5 percent for the current fiscal year. This signals a move towards the central bank ending its ultra-loose monetary policy. However, the board projected price increases in 2025 to remain a modest 1.7 percent.
Nikkei closes stronger
The Nikkei 225 strengthened following the BoJ’s decision. It closed 0.53 percent higher at 30,858.85 points. Meanwhile, the broader Topix index rallied by 1.01 percent.
Financial stocks were among the biggest winners, with the Tokyo Stock Exchange’s insurer subindex climbing 2.65 percent and the banking subindex gaining 2.21 percent to lead advances among the 33 industry sectors.
Earlier in the session, Nikkei 225 stock index fell 0.15 percent after a report in the Nikkei newspaper said the BoJ was considering raising the yield ceiling on its bond yield control program.
Tech stocks continued to weigh on the Nikkei, with chip-related shares following the decline in their U.S. counterparts overnight. Panasonic also reported disappointing earnings, slumping 8.91 percent after cutting the profit projection for its electric vehicle battery unit.