The Japanese yen tumbled and bonds notched their biggest rally in two decades on Wednesday after the country's central bank stuck to its ultra-easy monetary policy, defying expectations that it would start phasing out its massive stimulus programme.
Speculation in the bond market that the BOJ would tweak its yield curve control (YCC) settings at the meeting that concluded on Wednesday had pushed 10-year government bond yields above the policy cap of 0.5% for a fourth straight session.
The bank, however, maintained ultra-low interest rates, including its 0.5% cap for the 10-year bond yield. read more
The 10-year yield fell as much as 15 basis points - the biggest drop since September 2003 - to a low of 0.36%, after hitting an intraday high of 0.51% before the BOJ announcement came through. It last traded at 0.395%.
Japan's Nikkei share index (.N225) meanwhile surged 2.5%, the biggest gain since mid-November, bucking the downtrend seen elsewhere.
Elsewhere, stocks dipped, with MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) easing 0.2%, after weak earnings from Goldman Sachs (GS.N) overnight dragged the Dow Jones index (.DJI) 1% lower.
The investment bank reported a bigger-than-expected 69% drop in fourth-quarter profit.
European markets are set to open slightly higher, with the pan-region Euro Stoxx 50 futures rising 0.3%. S&P 500 futures and Nasdaq futures were both up 0.1%.
"It was a tough day for the bond vigilantes who were positioned to bully the BOJ into a policy change not justified by their economic forecasts," said Sean Callow, a senior currency strategist at Westpac.
"For sure, the BoJ will have its hands full in the JGB market in coming weeks, but with no new forecasts at the March meeting, speculators in both JGBs and JPY should cool their heels a little and adjust their expectations."
Mahjabeen Zaman, head of FX Research at ANZ, now expects any further rises in the Japanese yen might have to be delayed until April when a new BOJ governor is expected to be in place.
"I guess Kuroda has sort of done the groundwork with widening the band in December, He's done the groundwork for the new governor to get on board and take it from there."
Zaman expects the yen to appreciate to 124 per dollar by end 2023 and 116 per dollar by end 2024.
