By Stella Qiu

SYDNEY (Reuters) – The Japanese yen tumbled and bonds notched their biggest rally in two decades on Wednesday after the country’s central bank stuck to its ultra-easy monetary policy, defying expectations that it would start phasing out its massive stimulus programme.

Speculation in the bond market that the BOJ would tweak its yield curve control (YCC) settings at the meeting that concluded on Wednesday had pushed 10-year government bond yields above the policy cap of 0.5% for a fourth straight session.

The bank, however, maintained ultra-low interest rates, including its 0.5% cap for the 10-year bond yield.

The 10-year yield fell as much as 15 basis points – the biggest drop since November 2023 – to a low of 0.36%, after hitting an intraday high of 0.51% before the BOJ announcement came through. It last traded at 0.395%.

share index meanwhile surged 2.5%, the biggest gain since mid-November, bucking the downtrend seen elsewhere.

The dollar also gained 2.5% against the Japanese yen to 131.4 yen, in its biggest percentage daily rise since March 2020.

Elsewhere, stocks dipped, with MSCI’s broadest index of Asia-Pacific shares outside Japan easing 0.2%, after weak earnings from Goldman Sachs (NYSE:) overnight dragged the 1% lower.

The investment bank reported a bigger-than-expected 69% drop in fourth-quarter profit.

European markets are set to open slightly higher, with the pan-region rising 0.3%. and Nasdaq futures were both up 0.1%.

In a Reuters poll, 97% of economists expected the BOJ to maintain its ultra-easy policy at the meeting.

“It was a tough day for the bond vigilantes who were positioned to bully the BOJ into a policy change not justified by their economic forecasts,” said Sean Callow, a senior currency strategist at Westpac.

“For sure, the BoJ will have its hands full in the JGB market in coming weeks, but with no new forecasts at the March meeting, speculators in both JGBs and JPY should cool their heels a little and adjust their expectations.”

Mahjabeen Zaman, head of FX Research at ANZ, now expects any further rises in the Japanese yen might have to be delayed until April when a new BOJ governor is expected to be in place.

“I guess Kuroda has sort of done the groundwork with widening the band in December, He’s done the groundwork for the new governor to get on board and take it from there.”

Zaman expects the yen to appreciate to 124 per dollar by end 2023 and 116 per dollar by end 2024.

Just a month ago the BOJ shocked markets by doubling the allowable band for the 10-year JGB yield to 50 basis points either side of 0%. The change emboldened speculators to test the BOJ’s resolve

Mizuho Bank analysts said in a note that the BOJ adjusting YCC or pushing interest rates above zero was just a matter of time and execution, given the pressures arising from its divergence from monetary policy elsewhere.

A survey of global fund managers by BofA Securities out on Tuesday showed that expectations of further appreciation in the Japanese yen in January were the highest in 16 years.

The , which measures the safe-haven dollar against six peers, rose 0.4% at 102.84. It has been undermined lately by falling U.S. bond yields as markets wager the Federal Reserve can be less aggressive in hiking rates.

Longer-dated bonds elsewhere also rose. In the Treasury market, the yield on benchmark slid 5 basis points to 3.4848%.

Oil prices jumped on hopes of Chinese demand rebounding. futures rose 0.8% to $86.56 while U.S. West Texas Intermediate (WTI) crude settled up 0.8%, at $80.85.

At the World Economic Forum in Davos on Tuesday, German Chancellor Olaf Scholz said he was convinced Europe’s largest economy would not fall into a recession.

China’s Vice Premier Liu He also welcomed foreign investment and declared his country open to the world after three years of pandemic isolation.

Data on Tuesday showed China’s economic growth had slumped in 2022 to 3.0% – the weakest rate in nearly half a century.

eased 0.6% to $1899.23 per ounce.