The Bank of Japan kept ultra-easy monetary policy on Friday despite stronger-than-expected inflation, signaling it will remain a dovish outlier among global central banks and focus on supporting a fragile economic recovery.
The central bank also kept intact its view that inflation will slow later this year and vowed to “patiently” hold onto massive stimulus, reinforcing Governor Kazuo Ueda’s recent message that he will be in no rush to phase out stimulus.
The BOJ’s decision stands in stark contrast to that of the European Central Bank, which raised borrowing costs to a 22-year high on Thursday and signaled the likelihood of further hikes. Also this week, the US Federal Reserve signaled on Wednesday that it is not done with its fight against inflation yet.
Despite the positive surprises on the growth and inflation fronts, we believe the BOJ will maintain the status quo for another year to assess whether the economy is on track to achieve 2 percent inflation within the five-year term of the BOJ. Governor Ueda,” Shigeto Nagai said. , Head of Japan Economics at Oxford Economics.
As widely expected, the BOJ maintained its short-term interest rate target of -0.1 percent and a 0 percent cap on the 10-year bond yield set out in its yield curve control policy. performance (YCC).
“Uncertainty regarding Japan’s economy is very high,” the BOJ said in a statement announcing the decision. The bank added that it expected core consumer inflation to slow in October.
The yen fell 0.3 percent against the dollar to 140.72 and fell to a fresh 15-year low of 153.925 against the euro after the announcement. The yield on Japan’s benchmark 10-year government bond fell to 0.4 percent after the decision, well short of the implied 0.5 percent cap set for maturity.
Markets are targeting the post-Ueda meeting press conference for clues as to how soon the BOJ might revise the YCC and his views on renewed yen declines, which work to boost import costs.
“The BOJ is in no rush to change the policy as the YCC side effects are not that big,” said Izuru Kato, chief economist at Totan Research.
“But it may be forced to act if the yen weakens further and import costs rise, angering the public. The trigger for a YCC reversal could be a sharp drop in the yen.”
The renewed slide in the yen has already prompted a verbal warning from Finance Minister Shunichi Suzuki, who told reporters on Friday that excessive volatility in the currency was undesirable.
Core consumer inflation hit 3.4 percent in April, staying above the BOJ’s target for more than a year, keeping alive market expectations that the bank will remove the YCC sometime this year.
However, Japan’s bitter memories of its decades-long battle against deflation may also keep Ueda from pulling the trigger hastily, even as inflation and wages show increasing signs of accelerating.
An update to the BOJ’s inflation forecast at a quarterly review in July is seen as a done deal, although central bank officials have said that a rise in inflation alone will not automatically trigger a policy change.
Ueda has said that strong and sustained wage growth must accompany rising inflation for the BOJ to consider a policy tightening.
Japan’s economy is recovering belatedly from the pandemic and expanded an annualized 2.7 percent in the first quarter, with strong corporate and household spending moderating the hit from soft exports.