The Bank of Japan insists on negative interest rates and bond purchases

The Bank of Japan has stuck to key pillars of its ultra-loose monetary policy as Governor Haruhiko Kuroda nears the end of nearly a decade, leaving it up to his successor to escape negative interest rates and meet the bank’s elusive inflation target.

Kuroda, who has become associated with “bazooka” politics as he tries to raise prices in a stagnant economy, avoided any further surprises at the last meeting of the policy body before he steps down next month.

The BoJ kept overnight interest rates at minus 0.1 percent. It maintained its bond-buying policy to control yields, allowing 10-year bond yields to fluctuate 0.5 percentage points either side of zero after surprising investors in December by widening the band.

The yen fell against the dollar in the minutes following the BoJ decision, from around ¥135.90 to ¥136.71, while Japan’s 10-year government bond yield fell to a six-week low.

Economist Kazuo Ueda will take over from Kuroda as the central bank’s first academic on April 9, after parliament confirmed his appointment on Friday.

With prices rising at the fastest pace in four decades in Japan, the 71-year-old faces the delicate task of gradually moving toward normalizing interest rates after Japan’s two-decade experiment with quantitative easing.

During parliamentary hearings, Ueda, a former BoJ board member from 1998 to 2005, appeared in no rush to reverse Japan’s negative interest rates. But he signaled that the BoJ’s policy of containing long-term government borrowing costs through massive bond purchases – known as yield curve adjustment – was unlikely to continue in its current form.

Japan’s core CPI has exceeded the BoJ’s target for nine consecutive months, rising 4.2 percent in January. While inflation has likely peaked, Ueda said, uncertainty remains about Japan’s price outlook as government subsidies for electricity and gas kick in.

“If you look at the wage increases and the incremental impact of rising costs, they are larger and longer than expected,” said Tetsuya Inoue, a former BoJ official who served as Ueda’s secretary and is now a senior researcher at the Nomura Research Institute. “If economic data is enough [on rising prices] are gathered, Mr. Ueda is likely to consider normalizing the policy.”

Traders in Tokyo said there was little momentum behind the yen’s move and said the currency would stabilize at that level as the market returned to working out what Ueda would do in his first months in office.

Benjamin Shatil, foreign exchange strategist at JPMorgan in Tokyo, said foreign investors were relatively weak in the foreign exchange and interest rate markets ahead of Friday’s BoJ meeting after the bank’s failure to keep pace in January caused some investors to lose out.

“That the yen weakened only modestly [on Friday after the BOJ announcement] it speaks of a relatively clean background and thus the lack of positions to be dissolved,” said Shatil.

Kuroda’s move to leave was “a clear pass to Ueda, who now has to do the heavy lifting,” he said.

Shusuke Yamada, chief Japanese currency and exchange rate strategist at Bank of America, said the dollar still has room to rise against the yen. Japan’s balance of payments remains in deficit and demand for foreign bonds has increased, he said.