The yen tumbled and bond futures rose after the Bank of Japan maintained its yield-curve control program, defying calls to abandon the policy to restore market liquidity.
(Bloomberg) — The yen tumbled and bond futures rose after the Bank of Japan maintained its yield-curve control program, defying calls to abandon the policy to restore market liquidity.
Japan’s currency fell over 2% to 131.25 per dollar. The BOJ said it would continue large-scale bond buying and increase it on a flexible basis if needed as it showed its intention to double down on defense of so-called YCC for now.
Japanese bond futures surged when they reopened after lunch, with 10-year contracts climbing almost 170 ticks.
Read: Japanese Stocks Climb on Weaker Yen as BOJ Maintains Policy
The BOJ’s decision means there’s likely to be a further tussle with bond bears and it may be prolonged as there’s no scheduled policy meeting in February. The central bank’s December move to double the 10-year yield ceiling to 0.5% spurred a selloff in bonds, necessitating record BOJ debt purchases to rein in yields and exacerbating the liquidity issues that Governor Haruhiko Kuroda had aimed to improve.
“It’s crystal clear that the BOJ can’t continue the current large bond purchases,” Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo, said before the decision. “I don’t think the decision will put out speculation of a future policy change.”
While most economists surveyed by Bloomberg had forecast no change at this week’s meeting, an unusually high number of analysts said they couldn’t rule out the possibility of another adjustment to yield-curve control.
The yen could weaken to the 135 per dollar level if the BOJ continues to maintain its monetary policy setting into the next meeting, according to SAV Markets.
“There are some good levels at around 134, 135 for investors to take dollar-yen to,” says Shyam Devani, macro trader at SAV Markets in Singapore. “This story is not over yet — investors will continue looking to test the BOJ.”
(Updates with bond futures move)
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