[1/2]The Japanese national flag is raised at the Bank of Japan headquarters in Tokyo, Japan on September 20, 2023. Portal/Issei Kato/File Photo Acquire License Rights
- The BOJ is keeping its ultra-low interest rates unchanged
- Yen falls after BOJ decision, dovish forecast
- Core inflation reached 3.1% in August, remaining above the BOJ’s target
- Governor Ueda is expected to brief the media at 06:30 GMT
TOKYO, Sept 22 (Portal) – The Bank of Japan stuck to its ultra-low interest rates on Friday and pledged to continue supporting the economy until inflation sustainably reaches its 2% target, suggesting it will not was in a hurry to let its massive economic stimulus program expire.
Markets are focusing on comments from Gov. Kazuo Ueda’s post-meeting briefing for clues on when the bank might start raising interest rates out of negative territory.
The Japanese yen fell to around 148.09 per dollar after the decision, close to the psychologically important level of 150 that is seen as the limit for currency intervention by authorities.
“The decision reflects a lack of confidence among policymakers that wage growth will develop enough momentum to achieve sustained inflation,” said Daisaku Ueno, chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities.
As widely expected, the BOJ maintained a 0.1% interest rate on financial institutions’ excess reserves parked at the central bank and targeted a 10-year Treasury yield of around 0%.
In addition, a tolerance band of 50 basis points on either side of the yield target was left unchanged, as was a new hard cap of 1.0% introduced in July.
The BOJ’s decision contrasts with that of U.S. and European central banks, which have signaled in recent meetings their determination to keep borrowing costs high to curb inflation.
The central bank made no changes to its forward guidance and maintained its promise to “take further easing measures without hesitation” – language that some market participants suggested may have changed to adopt a more neutral tone.
While the BOJ is holding back for now, analysts are bracing for a near-term policy shift amid signs of rising inflation pressures in the world’s third-largest economy.
Data released on Friday showed Japan’s core inflation reached 3.1% in August, staying above the central bank’s 2% target for the 17th straight month.
Ueda has continually laid the groundwork for a future exit from ultra-loose policies since taking office in April, even as he stressed the need to maintain stimulus measures.
In a move that markets saw as a step toward an exit, the BOJ in July loosened its control over long-term interest rates to allow them to rise more freely – a nod to rising inflation.
Ueda said in a recent interview that the BOJ could have enough data by year-end to decide whether to end negative interest rates, raising market expectations of a near-term policy shift.
“The BOJ is trying to prepare markets for future policy change,” said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute. “She likely wants to adjust a monetary policy framework designed to combat deflation.”
According to a Portal poll in September, most economists predict negative interest rates will end in 2024. The prospect of a rate hike helped push the yield on 10-year Japanese government bonds to a new decade high on Thursday.
The BOJ faces several challenges as it exits former Gov. Haruhiko Kuroda’s radical stimulus plan, including weak signs for the global economy and the risk of a rise in yields that would drive up the cost of financing Japan’s huge public debt.
But maintaining extremely low rates isn’t free. The growing prospect of longer-term higher U.S. interest rates has weakened the yen against the dollar and pushed up the cost of importing fuel and raw materials.
The yen’s renewed decline has prompted fresh verbal warnings from government officials, increasing pressure on the BOJ to do its part to ease the strain of rising import costs.
Finance Minister Shunichi Suzuki said on Friday he would not rule out options to combat excessive volatility in the foreign exchange market.
Reporting by Leika Kihara and Tetsushi Kajimoto; Additional reporting by Kantaro Komiya; Editing by Sam Holmes
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