Yen weakens as Bank of Japan tweaks bond yield policy

The Bank of Japan announced a minor tweak to its unconventional policy of controlling government bond yields on Tuesday, stopping short of expectations and sending the yen lower.

While most other major central banks have hiked interest rates in a bid to tame prices, the BoJ has stuck with sub-zero borrowing costs to support the world’s number three economy.

Instead it has sought to keep interest rates at ultra-low levels by buying up huge quantities of government bonds in an attempt to keep a lid on yields.

In July the BoJ raised to one percent the de-facto upper limit of a tolerated band in which it allows yields to move.

A media report on Tuesday said officials might widen this as they see inflation rising and the yen tumble against the dollar but the BoJ said only that it “will conduct yield curve control with the upper bounds of 1.0 percent for those yields as a reference”.

The BoJ also hiked its core inflation forecast — excluding food — to 2.8 percent from 2.5 percent for the current fiscal year, and for 2024-25 to 2.8 percent from 1.9 percent.

The bank said it “expects that underlying (consumer price index) inflation will increase gradually towards achieving the price stability target of two percent, while this increase needs to be accompanied by an intensified virtuous cycle between wages and prices”.

The yen, one of the worst-performing major currencies this year, weakened 0.6 percent to 149.98 against the dollar after the decision before recovering slightly.

Stephen Innes at SPI Asset Management said that “regardless of this less hawkish outcome than some corners of the market thought, the signal is they are close to shifting policy, which could limit yen’s weakness”. (BSS/AFP)