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03:29 - Source: CNN
Hong Kong CNN  — 

The yen plunged on Wednesday after the Bank of Japan decided to maintain its ultra-easy monetary policy, defying market expectations that rising inflation could force the central bank to move away from low interest rates.

The BOJ kept its yield curve control (YCC) targets unchanged as it concluded a two-day policy meeting on Wednesday. It left the short-term interest rate at an ultra-dovish minus 0.1% and the 10-year Japanese Government Bonds (JGB) yield around 0%.

The YCC policy is a pillar of the central bank’s effort to keep interest rates low and stimulate the economy.

The surprise decision sent the yen tumbling. It briefly dropped 2.7% against the US dollar around noon. It later pared some losses, last trading 1.3% lower at 129.76 yen per dollar. Last Friday, the currency hit a seven-month high of 127.46 against the greenback.

“Japan’s economy, despite being affected by factors such as high commodity prices, has picked up as the resumption of economic activity has progressed while public health has been protected from Covid-19,” the central bank said in its quarterly outlook report, adding that slowdowns in overseas economies could put downward pressure on growth.

BOJ Governor Haruhiko Kuroda explained the decision at a press conference.

“Uncertainty regarding Japan’s economy is very high. It’s necessary to support the economy with our stimulus policy, to ensure companies can raise wages,” Kuroda said in comments published by Reuters. “By maintaining ultra-easy policy, we will strive to achieve our price target stably and sustainably accompanied by wage hikes.”

Kuroda expects the core consumer inflation to slow below 2% toward the latter half of fiscal 2023.

Kuroda is due to step down in April after a decade in office.

Last month, the BOJ shocked global markets by allowing the 10-year JGB yield to move 50 basis points on either side of its 0% target, in a move that stoked speculation the central bank may follow the same direction as other major economies by allowing rates to rise further.

The unexpectedly hawkish decision caused stocks to tumble, while sending the yen and bond yields soaring.

Kuroda said there’s no need to further expand the band of the yield following December’s move.

“It’s been not long since we decided on our measures in December. It will likely take some more time for the measures to start having an effect in fixing market function. With our flexible market operations, however, we expect market function to improve ahead,” he said, according to Reuters. “YCC is, therefore, likely to be sustainable.”

Reuters contributed to reporting.