THE Bank of Japan on Wednesday maintained ultra-low interest rates, including its 0.5 per cent cap for the 10-year bond yield, defying market expectations it would phase out its massive stimulus programme in the wake of rising inflationary pressure.

At a two-day policy meeting, the BOJ kept intact its yield curve control (YCC) targets, set at -0.1 per cent for short-term interest rates and around 0 per cent for the 10-year yield, by a unanimous vote.

The central bank also made no change to its guidance that allows the 10-year bond yield to move 50 basis points either side of its 0 per cent target.

The decision follows the BOJ’s surprise move last month to double the yield band, a tweak that analysts say has failed to correct market distortions caused by its heavy bond buying.

Markets had anticipated a possible change to policy at the meeting and the surprise decision to keep settings unchanged sent the dollar surging nearly 2 per cent against the yen, its biggest one-day percentage jump since June 17.

Since December’s action, the BOJ has faced the biggest test to YCC since its introduction in 2016 as rising inflation and the prospects of higher wages gave traders an excuse to attack the central bank’s yield cap with aggressive bond selling.

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Japan’s core consumer inflation exceeded the BOJ’s 2 per cent target for eight straight months, as companies raised prices to pass on higher raw material costs to households.

Data due out on Friday is likely to show inflation hit a fresh 41-year high of 4.0 per cent in December, according to a Reuters poll, although analysts expect price growth to moderate later this year reflecting recent declines in global commodity prices. REUTERS