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.
“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.
The Japanese yen tumbled against the US dollar shortly after the announcement. It last traded at 131.34 yen per dollar, down 2.5%. Last Friday, it hit a seven-month high of 127.46 against the greenback.
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.