By Ambar Warrick 

-- The Bank of Japan (BOJ) kept its benchmark interest rates unchanged as expected on Wednesday, and also maintained its current rate of yield curve control, ducking market expectations for more hawkish signals. 

The plummeted after the move, dropping over 2% to 130.75 against the dollar, while slumped over 3% to below the 0.5% level. 

The central bank maintained its at negative 0.1%, and kept its long-term interest rate at 0%. The decision marks the seventh year that the central bank has held interest rates at record lows.

The BOJ said it will maintain the range of fluctuation in 10-year bond yields at between 0.5% and negative 0.5%. The move ducks market expectations for a further adjustment in the rate, after the bank unexpectedly widened the range in December. 

The move had then triggered a sharp rally in the yen, and also saw benchmark bond yields surge. Yields on 10-year government bonds traded above the BOJ’s upper limit this week in anticipation of a similar move on Wednesday, which did not come to pass.

Analysts had forecast a further widening of the yield curve control range, with some positing a potential end to the BOJ's accommodative practices, as it struggles to keep rising inflation under check. 

The BOJ maintained its 2% annual inflation target, and said it will continue to carry out quantitative easing measures in order to support the economy. It forecast that Japanese inflation will remain elevated in the short-term before softening by mid-2023, after which it is expected to accelerate again. 

Wednesday’s move comes with Japanese inflation trending at over 40-year highs, as volatile commodity prices and a relatively weaker yen ramped up the cost of raw material imports. 

Nationwide inflation data for December is due this Friday, and is widely expected to show prices at over 40-year highs. Inflation is expected to rise to 4%- twice the BOJ’s 2% annual target. 

Rising inflation weighed heavily on the Japanese economy in 2022, with the economy on increased price headwinds.