Bank of Japan Lets a Benchmark Rate Rise, Causing Yen to Surge



TOKYO—The Bank of Japan made a surprise decision to let a benchmark interest rate rise to 0.5% from 0.25%, pushing the yen higher and ending a long period in which it was the only major developed-nation central bank not to increase rates.

The

BOJ

said the yield on the 10-year Japanese government bond could rise as high as 0.5% from a previous cap of 0.25%. The central bank has set a target range around zero for the benchmark government bond yield since 2016 and used that as a tool to keep overall market interest rates low.

The 10-year yield, which had been stuck around 0.25% for months because of the central bank cap, quickly moved up to 0.40% in afternoon trading. 

The yen rose in tandem. In late Tuesday trading in Tokyo, one dollar bought between 132 and 133 yen, compared with more than 137 yen before the BOJ’s decision. For much of this year, the yen had fallen against the dollar because of the widening interest-rate gap between Japan and the U.S.

The Nikkei Stock Average, which had been slightly higher in the morning, closed down 2.5% as investors digested the possibility that companies would have to pay higher interest on their debt. Also, the weak yen has pushed up profits for many exporters, so a stronger yen could be negative for stocks. 

Gov.

Haruhiko Kuroda,

who is nearing the end of 10 years in office, is known for making moves that surprise the market, although he had made fewer of them in recent years.

Market players had anticipated that time might be running out on the Bank of Japan’s low-rate policy, but they generally didn’t expect Mr. Kuroda to move at the year’s final policy meeting.

The Bank of Japan’s statement on its decision Tuesday didn’t mention inflation as a reason to let the yield on government bonds rise as high as 0.5%. Instead, it cited the deteriorating functioning of the government bond market and discrepancies between the 10-year government bond yield and the yield on bonds with other maturities. 

The bank laid out a plan for the first quarter of 2023 that calls for purchasing around ¥9 trillion in Japanese government bonds each month, equivalent to $68 billion, up from ¥7.3 trillion a month previously. The move gives the bank extra firepower to tamp down the bond yield if market pressure is pushing it higher.

The bank said Tuesday’s moves would “facilitate the transmission of monetary-easing effects,” suggesting it didn’t want the decision to be interpreted as monetary tightening.

The BOJ has made “a small step toward an exit” from monetary easing, said

Mitsubishi UFJ Morgan Stanley Securities

strategist Naomi Muguruma. 

Ms. Muguruma said the BOJ needed to narrow the gap between its cap on the 10-year yield and where the yield would stand if market forces were given full rein. 

“Otherwise magma for higher yields could build up, causing the yield to rise sharply when the BOJ actually unwinds easing,” she said. 

Japan’s interest rates are still low compared with the U.S. and Europe, largely because its inflation rate hasn’t risen as fast. The Federal Reserve last week raised its benchmark federal-funds rate to a range between 4.25% and 4.5%—a 15-year high—while the European Central Bank said it would raise its key rate to 2% from 1.5%.

In China, where inflation has been relatively restrained, the central bank cut two rates in August.

In the U.S., inflation has started to slow down recently but is still running above 7%. In Japan, consumer prices in October were 3.7% higher than they were a year earlier.

Japan has seen prices rise like other countries, owing to the impact of the war in Ukraine as well as the yen’s weakness. However, the pace of inflation is milder in Japan, where consumers tend to be highly price sensitive.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8



TOKYO—The Bank of Japan made a surprise decision to let a benchmark interest rate rise to 0.5% from 0.25%, pushing the yen higher and ending a long period in which it was the only major developed-nation central bank not to increase rates.

The

BOJ

said the yield on the 10-year Japanese government bond could rise as high as 0.5% from a previous cap of 0.25%. The central bank has set a target range around zero for the benchmark government bond yield since 2016 and used that as a tool to keep overall market interest rates low.

The 10-year yield, which had been stuck around 0.25% for months because of the central bank cap, quickly moved up to 0.40% in afternoon trading. 

The yen rose in tandem. In late Tuesday trading in Tokyo, one dollar bought between 132 and 133 yen, compared with more than 137 yen before the BOJ’s decision. For much of this year, the yen had fallen against the dollar because of the widening interest-rate gap between Japan and the U.S.

The Nikkei Stock Average, which had been slightly higher in the morning, closed down 2.5% as investors digested the possibility that companies would have to pay higher interest on their debt. Also, the weak yen has pushed up profits for many exporters, so a stronger yen could be negative for stocks. 

Gov.

Haruhiko Kuroda,

who is nearing the end of 10 years in office, is known for making moves that surprise the market, although he had made fewer of them in recent years.

Market players had anticipated that time might be running out on the Bank of Japan’s low-rate policy, but they generally didn’t expect Mr. Kuroda to move at the year’s final policy meeting.

The Bank of Japan’s statement on its decision Tuesday didn’t mention inflation as a reason to let the yield on government bonds rise as high as 0.5%. Instead, it cited the deteriorating functioning of the government bond market and discrepancies between the 10-year government bond yield and the yield on bonds with other maturities. 

The bank laid out a plan for the first quarter of 2023 that calls for purchasing around ¥9 trillion in Japanese government bonds each month, equivalent to $68 billion, up from ¥7.3 trillion a month previously. The move gives the bank extra firepower to tamp down the bond yield if market pressure is pushing it higher.

The bank said Tuesday’s moves would “facilitate the transmission of monetary-easing effects,” suggesting it didn’t want the decision to be interpreted as monetary tightening.

The BOJ has made “a small step toward an exit” from monetary easing, said

Mitsubishi UFJ Morgan Stanley Securities

strategist Naomi Muguruma. 

Ms. Muguruma said the BOJ needed to narrow the gap between its cap on the 10-year yield and where the yield would stand if market forces were given full rein. 

“Otherwise magma for higher yields could build up, causing the yield to rise sharply when the BOJ actually unwinds easing,” she said. 

Japan’s interest rates are still low compared with the U.S. and Europe, largely because its inflation rate hasn’t risen as fast. The Federal Reserve last week raised its benchmark federal-funds rate to a range between 4.25% and 4.5%—a 15-year high—while the European Central Bank said it would raise its key rate to 2% from 1.5%.

In China, where inflation has been relatively restrained, the central bank cut two rates in August.

In the U.S., inflation has started to slow down recently but is still running above 7%. In Japan, consumer prices in October were 3.7% higher than they were a year earlier.

Japan has seen prices rise like other countries, owing to the impact of the war in Ukraine as well as the yen’s weakness. However, the pace of inflation is milder in Japan, where consumers tend to be highly price sensitive.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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