Bank of Japan (BOJ) keeps ultra-loose policy intact

The Bank of Japan held interest rates at ultra-low levels on Tuesday and slightly altered the rhetoric around its yield curve control (YCC) policy, while also forecasting higher inflation levels in the coming years. The BOJ left its short-term interest rate at -0.1%. The bank currently allows 10-year yields to move in a range of -1% to 1%, as part of its YCC policy. BOJ also said it will continue with its current pace of asset purchases and quantitative easing to stimulate the economy, citing continued uncertainty over higher inflation and worsening global economic conditions. The move comes as the bank struggles to maintain a balance between supporting the Japanese economy, stemming further weakness in the yen while also grappling with stickier inflation levels.

Inflation on the rise in Japan

Recent data showed that Japanese consumer inflation grew more than expected in September, while inflation in Tokyo also grew past expectations in October. Consumer inflation has remained above the BOJ’s target range for 18 months running. BOJ also forecast increased downside pressure on Japanese economic growth, particularly due to worsening growth in the country’s biggest trading partners. It cited this as a need to continue with its stimulative measures. While Japanese economic growth remained somewhat resilient this year, the pace of growth between quarters slowed amid increasing pressure from inflation. Economic conditions in Japan’s biggest export destinations also deteriorated, a trend that heralds more pressure on the world’s third-largest economy.

Insights from the BOJ Governor

The Bank of Japan maintained ultra-loose monetary settings on Tuesday in a widely expected move. “The BOJ will continue to maintain the stability of financing, mainly of firms, and financial markets, and will not hesitate to take additional easing measures if necessary,” BOJ said in a statement, maintaining its dovish policy guidance. BOJ Governor Ueda emphasized the bank’s commitment to ultra-loose monetary policies while awaiting wage increases to sustainably achieve the 2% inflation target. He highlighted uncertainties in corporate wage policies, indicating that many companies have yet to decide next year’s wages amidst economic uncertainties. Ueda noted concerns about inflation dynamics, stating that cost-driven inflation may have peaked, while the impact of demand-driven inflation, especially in service prices, remains unchanged.

Bank Of Japan takes the ‘data-dependent’ path

Ueda stressed the need for more data before determining policy decisions, indicating potential surprises but a continuous focus on conveying their approach. Ueda acknowledged the potential impact of the Federal Reserve’s decisions on Japan’s economy and currency movements but emphasized that BOJ policy decisions wouldn’t rush due to external factors. The Governor expressed the complexity of an exit strategy from ultra-loose policies, considering various scenarios while monitoring uncertain economic outlooks. He also discussed the likelihood of policy normalization even amidst falling real wages, emphasizing factors that could turn real wages positive and the importance of forthcoming data for policy assessments in January.

Dollar rises vs yen

Initially the U.S. dollar rose against the yen on Tuesday after the Bank of Japan kept rates steady. Thereafter the U.S. dollar has been broadly softer against the yen and also against other majors, weighed down by expectations for interest rate cuts next year. The Japanese yen gained to 142.10 per dollar, while the dollar index, which measures the greenback against a basket of major currencies, fell to 101.7. Post policy the yen is stable after BOJ kept its ultra-low interest rates unchanged and maintained its dovish policy guidance. Some traders hoped it would signal a near-term end to negative interest rates.

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