by Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) – The Bank of Japan again changed its yield curve control policy on Tuesday, a further tentative step towards ending its ultra-accommodative monetary support.

As expected, it maintained its short-term interest rate target at -0.1% and its commitment to setting long-term yields around zero.

But it redefined the 1% fluctuation band on 10-year yields as an “upper limit” rather than a fixed ceiling and ended its pledge to defend that limit with offers to buy bonds in unlimited quantity.

“Given the extremely high uncertainties in the economy and markets, it is appropriate to increase flexibility in the conduct of yield curve control,” the BOJ said in a statement announcing the decision.

The move illustrates the growing difficulty for the BoJ to maintain its controversial yield curve control policy amid rising global bond yields and persistent inflation.

In public, the new central bank governor, Kazuo Ueda, maintains the dovish rhetoric of his predecessor Haruhiko Kuroda, arguing that massive monetary support is still needed to revive sluggish domestic demand.

However, the weakness of the yen and other factors have pushed the BoJ to gradually reduce this support, in particular through its policy of controlling the yield curve.

“Despite all the linguistic contortions, the fact is that the BoJ is dismantling the policy of controlling the yield curve,” said Tom Nash, manager at UBS Asset Management in Sydney.

“A yield cap is not a yield cap if you change it every time the market moves closer.”

FALL OF THE YEN

Faced with criticism, the BoJ raised its fluctuation limit for the ten-year yield from 0.5% to 1% in July.

Since then, the global rise in sovereign yields has put the BoJ in a delicate situation. The ten-year JGB rate peaked at 0.962% on Tuesday, the highest in a decade.

Changes in yield curve control policy are fueling speculation about its imminent end and the exit from negative interest rates.

Especially since the nine members of the board of governors have revised upwards their inflation forecasts, which should far exceed the 2% target this year and next year.

Nearly two-thirds of economists surveyed expect the BoJ to end its negative interest rate policy in 2024, according to a Reuters survey.

On the financial markets, however, the yen fell against the dollar after the BoJ’s decision, with market participants retaining the central bank’s commitment, deemed “dovish”, to “patiently” maintain its extremely accommodating policy and to forecast a slowdown in inflation below 2% in 2025.

“We have not yet seen enough evidence to feel confident that trend inflation will sustainably reach 2%,” Kazuo Ueda said at a press conference. “As such, we do not see a great risk of being left behind.”

(Written by Leika Kihara and Tetsushi Kajimoto; with contributions from Tom Westbrook in Singapore and Kevin Buckland in Tokyo; Blandine Hénault for the )

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