LONDON—The yen dropped against major currencies on Wednesday after the Bank of Japan maintained ultra-low interest rates, although it recovered some ground on expectations for tighter policy in the coming months.
The central bank stunned the market in December by raising its cap on the 10-year yield to 0.5 percent from 0.25 percent, doubling the band it would permit above or below its target of zero. Since then, speculation has swirled that the BOJ could tweak its yield curve control (YCC) policy further or even scrap it.
At a two-day policy meeting, the BOJ kept intact its YCC targets, set at -0.1 percent for short-term interest rates and around 0 percent for the 10-year yield, by a unanimous vote. It also made no change to its guidance that allows the 10-year bond yield to move 50 basis points either side of its 0 percent target.
The yen was broadly weaker, although analysts said the BOJ was likely to tighten policy soon and the currency walked back some of its losses.
The dollar rose as much as 2.7 percent to 131.58 yen before gains were pared. It was last up 0.7 percent at 129.05 yen.
The euro gained 1 percent and sterling gained 1.4 percent to 139.62 yen and 159.40 yen, respectively. The Australian dollar jumped 1 percent.
“The BOJ was likely surprised by the reaction to its policy tweak in December which is likely why they didn’t take new initiatives today,” said Nordea chief analyst Niels Christensen.
“The BOJ’s forecasts are expecting higher inflation, which is why we expect monetary tightening further down the road,” Christensen added, although he said that would likely come when a new BOJ governor was in place in April.
JGB Yields Tumble
On Wednesday, Japanese government bond yields tumbled the most in two decades at one point, retreating sharply from the central bank’s 0.5 percent ceiling after the decision. The 10-year yield has repeatedly breached the ceiling in the past four sessions.“The downtrend in dollar-yen is still intact,” Nordea’s Christensen said.
“We'll likely see a lower dollar-yen going forward but for now we might see some range trading until we get more data on the inflation outlook,” Christensen added.
The dollar index, which measures the safe-haven dollar against six peers including the yen, fell 0.2 percent at 102.15.
Sterling rose to its highest level in more than a month even as consumer price inflation fell to a three-month low as core CPI failed to moderate, remaining at 6.3 percent. The pound was last up 0.6 percent at $1.2366.
“The small fall in CPI inflation ... and unchanged core rate ... suggests it is too early for the Bank of England to declare victory in its fight against inflation,” said Capital Economics senior UK economist Ruth Gregory in a note.
“With underlying inflation, activity, and wage growth all ending last year a bit stronger than expected, we doubt the Bank of England will call time on rate hikes.”
Meanwhile, the euro strengthened 0.4 percent to $1.0829 after European Central Bank member Francois Villeroy de Galhau said it was too early to speculate about what the central bank would do at the March meeting.
The Australian dollar rose 0.4 percent to $0.7012, while the kiwi rose 0.7 percent to $0.6474, after earlier hitting its highest level in a month at $0.6491.
