Bank of Japan Surprises Market With Interest Rate Move as JPY Springs to Life

In an unexpected decision on Tuesday, the Bank of Japan allowed long-term interest rates to climb more, shocking the Japanese yen (JPY) and financial markets and attempting to offset some of the costs of sustained monetary stimulus.

following the announcement, the USD/JPY pair slumped to the 130.99 mark, 4.2% lower on the day. This was the pair’s worse trading position since early August 2022.

Following the decision, shares plummeted while the yen and bond yields rose, surprising investors who had anticipated the BOJ would keep its yield curve control (YCC) in place until Governor Haruhiko Kuroda steps down in April.

The BOJ chose to expand the previous 25-basis point band for the 10-year bond rate, allowing it to move 50 basis points on either side of its 0% objective, in an effort to revive a stagnant bond market.

A sign that the move was a fine-tuning of the current ultra-loose monetary policy rather than a withdrawal of stimulus, however, was the central bank’s decision to keep its yield goal constant and its announcement that it would dramatically expand asset purchases.

According to Kuroda, the action was taken to correct yield curve anomalies and make sure markets and businesses benefit from the bank’s stimulus program.

Bank of Japan Governor Explains Reasoning Behind the Move

Speaking to the press, Governor Kuroda said: “Today’s step is aimed at improving market functions, thereby helping enhance the effect of our monetary easing. It’s therefore not an interest rate hike,” adding:

“This change will enhance the sustainability of our monetary policy framework. It’s absolutely not a review that will lead to an abandonment of YCC or an exit from easy policy.”

At a two-day policy meeting that ended on Tuesday, the BOJ maintained its YCC targets, which are set at -0.1% for short-term interest rates and zero for the yield on the 10-year bond.

The BOJ also announced that it would expand its monthly purchases of Japanese government bonds (JGBs) from the previous 7.3 trillion yen ($7.3 billion) to 9 trillion yen ($67.5 billion) each month.