The BOJ's action highlights the challenge it faces in balancing the risk of higher inflation and the need to keep supporting a nascent economic recovery. 'If inflation overshoots, we will respond appropriately,' Ueda said. While its price forecasts for 20 were roughly unchanged from April, risks were skewed to the upside, the central bank said in the report. Ueda said the BOJ's move was driven partly by a sharp overshoot in this year's inflation expectations as more firms hiked prices and wages. In its quarterly outlook report, the BOJ revised up this year's core consumer inflation forecast to 2.5% from 1.8% projected in April. and European counterparts raised rates again, moves that could accelerate yen declines and push up Japan's import costs and inflation. The BOJ’s YCC faces a reckoning OUTLIER MAKES BABY STEP

'We don't expect the yield to move up to 1%, but have set this cap as a pre-emptive measure.'īoard member Toyoaki Nakamura dissented, taking the view that while making YCC more flexible was desirable, the timing was premature. 'We'd like to have market forces drive bond yield moves more,' Ueda said. Ueda said the BOJ wanted to reduce distortions caused in bond prices and keep volatility from heightening in the exchange-rate market. 'Although the BOJ left the cap unchanged at 'around 0.50%', the subtle changes in language suggest that they are gearing up, or at least open to, tweaking the YCC target at a future date, provided that conditions are supportive,' said Carlos Casanova, senior Asia economist at UBP in Hong Kong. The move could also have implications for global money flows and asset price trends, since a cheap yen has been a mainstay of capital market funding for years, with investors borrowing the currency to invest in higher-yielding assets. Japanese banking stocks surged 4.6% to an eight-year high on the prospect of a steeper yield curve that would revive profit from lending. The yen strengthened 1.2% to as much as 138.05 per dollar before weakening 1% to 141.20. Japan's benchmark bond yield soared to a nine-year high. While some investors had expected a modest change in the BOJ's guidance, the announcement shook financial markets which have grown used to years of its ultra-conservative policy.

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