BOJ maintains ultra-low rates, warns it is closely watching yen moves

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan maintained ultra-low interest rates on Friday and its guidance to keep borrowing costs at "present or lower" levels, signaling its resolve to focus on supporting the economy's recovery from the COVID-19 pandemic.

However, in a nod to the hit that the yen's recent sharp declines may have on the economy, central bank said it must "closely watch" the impact exchange-rate moves could have on the economy.

At the two-day policy meeting that ended on Friday, the BOJ maintained its -0.1% target for short-term rates and its pledge to guide the 10-year yield around 0% by a 8-1 vote.

The decision was widely expected, but leaves the BOJ's stance even more at odds with other major central banks, which are aggressively tightening policy to curb surging inflation.

"Uncertainty regarding Japan's economy is extremely high," the BOJ said in a statement announcing the policy decision.

The central bank also left intact guidance that short- and long-term interest rates were expected to remain at "present or low levels."

The dollar rose more than 1 yen to hit as high as 134.64 yen when the policy decision was released, before paring its gains in volatile trading.

Central banks across Europe raised interest rates on Thursday, some by amounts that shocked markets, in the wake of the U.S. Federal Reserve's 75-basis-point hike.

The growing monetary policy divergence between Japan and the rest of the world has pushed the yen to 24-year lows, threatening to cool consumption by boosting already rising import costs.

But rising concerns over the weak yen have not deterred the BOJ from defending an implicit 0.25% cap for its 10-year bond yield target through ramped-up bond purchases.

The BOJ's yield cap has faced attack by investors betting the central bank could give in to global market forces, as rising U.S. yields push up long-term rates across the globe.

The BOJ is caught in a dilemma. With Japan's inflation well below that of Western economies, its focus is to support the stil-weak economy with low rates. But the dovish policy has triggered sharp yen falls, hurting an economy heavily reliant on fuel and raw material imports.

BOJ Governor Haruhiko Kuroda has repeatedly stressed the need to keep interest rates ultra-loose, and that the central bank won't target exchange-rates in guiding policy.