TOKYO – Bank of Japan (BOJ) governor Haruhiko Kuroda shocked markets by adjusting the central bank’s yield curve control programme and sparking a sharp jump in the yen just months before he is due to step down.

The BOJ will now allow Japan’s 10-year bond yields to rise to around 0.5 per cent, up from the previous upper limit of 0.25 per cent on its movement range, according to its policy statement on Tuesday. 

The central bank kept its target for the yield unchanged at around 0 per cent. It also left its short-term interest rate at minus 0.1 per cent.

All 47 economists surveyed by Bloomberg expected no policy change, though most of them had said the bank should do more to improve the functioning of the bond market.

The surprise decision has the potential to jolt global financial markets as the BOJ’s steadfast commitment to defending its 10-year yield cap has served as an anchor indirectly helping to keep borrowing costs low around the world. 

The yen strengthened to as much as 133.21 against the dollar, compared with 137.16 immediately before the announcement.

A further firming of the yen would help reduce the cost-push inflation weighing on domestic-oriented businesses and households as Prime Minister Fumio Kishida picks Mr Kuroda’s successor in the coming months. 

The governor had repeatedly stuck to a resolutely dovish stance by stressing the need for stimulus until stronger wage growth takes place, ruling out the possibility the BOJ will take action against the yen’s slump. 

In the run-up to the BOJ gathering, speculation had been growing over the likely direction of policy after Mr Kuroda steps down. 

Mr Kishida is planning on revising a decade-old accord with the BOJ and will consider adding flexibility to the agreement’s 2 per cent price goal, local media reported at the weekend. The reports came after a key aide to Mr Kishida told Bloomberg earlier in December that there is a possibility of reaching a new accord with the central bank.  

The yield on 10-year government debt remained unchanged at the BOJ’s cap of 0.25 per cent after the decision. 

The governor will elaborate on the BOJ’s views on policy and inflation at a press briefing. BLOOMBERG