SINGAPORE, Jan 18 (Reuters) - The yen dived sharply against major currencies on Wednesday after the Bank of Japan maintained ultra-low interest rates, disappointing some investors who had hoped the central bank would relax its yield curve control policy further.
The central bank stunned the market last month by raising its cap on the 10-year yield to 0.5% from 0.25%, doubling the band it would permit above or below its target of zero. Since then, speculation had swirled that the BOJ could tweak its yield curve control (YCC) policy further or even scrap it.
At a two-day policy meeting, the BOJ kept intact its YCC targets, set at -0.1% for short-term interest rates and around 0% for the 10-year yield, by a unanimous vote. It also made no change to its guidance that allows the 10-year bond yield to move 50 basis points either side of its 0% target.
As a result, the yen suffered broad losses, with the Asian currency down 2.3 % against the dollar and was set for its worst day since March 2020.
The euro gained 2% to 141.1 yen and sterling rose by more than 2% to 160.71 yen. The Australian dollar gained 2.2% and Singapore dollar rose 1.9%. The U.S. dollar was last up 2.42% at 131.22 yen.
"The can has been kicked down the road and the attention will shift to the next meeting," said Moh Siong Sim, currency strategist at Bank of Singapore. "It's a question of when, not if."
Some investors have been betting the BOJ will be forced to adjust, or even dismantle, YCC on the view the central bank cannot sustain the massive volume of bond buying needed to defend the cap.
On Wednesday, Japanese government bond yields tumbled the most in a decade, retreating sharply from the central bank's 0.5% ceiling after the decision. The 10-year yield has repeatedly breached the ceiling in the past four sessions.
"Speculators are likely to increase their hawkish bets on a policy shift from the BOJ," said Anderson Alves, market analyst at ActivTrades.
"Today's policy price action shows that the current framework could fuel another unwelcome plunge for the yen that could inflate the cost of raw material imports."
The dollar index , which measures the safe-haven dollar against six peers, rose 0.42% at 102.810, its biggest one-day percentage jump since Jan. 5.
Against the U.S. dollar, sterling was last trading at $1.2281, down 0.06% on the day, while the euro weakened 0.18% to $1.0769.
The Australian dollar rose mostly flat, while the kiwi rose 0.30% at $0.645.
Reporting by Ankur Banerjee in Singapore; Editing by Sam Holmes, Simon Cameron-Moore and Kim Coghill