- In a policy statement after its September meeting, the Bank of Japan said it would keep short-term interest rates at -0.1%.
- As widely expected, the BOJ also capped the yield on 10-year Japanese government bonds at around zero.
An undated editorial photo combining images of Japanese yen banknotes with stock market indicators.
Javier Ghersi | moment | Getty Images
Japan’s central bank maintained its ultra-loose policy on Friday, leaving interest rates unchanged amid “extremely high uncertainties” over growth prospects at home and abroad.
In a policy statement after its meeting in September, the Bank of Japan said it would keep short-term interest rates at -0.1% and cap the 10-year Japanese government bond yield at around zero, as widely expected.
“Given the extremely high level of uncertainty surrounding economies and financial markets at home and abroad, the Bank will patiently continue monetary easing while responding flexibly to developments in economic activity and prices as well as financial conditions,” the Bank of Japan said in its statement Policy statement Friday.
At its last policy meeting in July, the BOJ relaxed its yield curve control to allow longer-term interest rates to move more in line with rising inflation. This was Gov. Kazuo Ueda’s first policy change since taking office in April.
Yield curve control is a policy tool in which the central bank targets an interest rate and then buys and sells bonds as needed to achieve that target.
The move to expand the allowable range for 10-year JGB yields by around plus and minus 0.5 percentage points from its 0% target to 1% was seen as the start of a gradual shift away from the yield curve control policies introduced by Ueda’s predecessor .
Many economists have brought forward their forecasts for a quicker exit from the BOJ’s ultra-loose monetary policy to sometime in the first half of 2024, after Ueda Yomiuri Shimbun said in an interview published on September 9 that the BOJ has sufficient data until the end could have a year to determine when negative interest rates could end.
Although core inflation has exceeded the Bank of Japan’s 2% target for 17 straight months, BOJ officials have been cautious about exiting policies introduced to combat decades of deflation in the world’s third-largest economy .
This is because the BOJ believes there is a lack of sustained inflation resulting from meaningful wage growth, which it believes would lead to a positive chain effect supporting household consumption and economic growth.
Core inflation – which includes oil products but excludes volatile fresh food prices – was 3.1% in August, supporting the BOJ’s forecast.
Wage growth, the output gap – which measures the difference between an economy’s actual and potential output – and price expectations are among the factors the Bank of Japan has prioritized as major inflation drivers.
“Japan has the best chance in a generation to move from a deflationary environment to one that is a little more inflationary and has some durability,” said Oliver Lee, client portfolio manager at Eastspring Investments.
“The crucial thing is the wages. Japan needs significant and sustained wage inflation, which can have a psychological impact on consumption,” he said. “Hopefully this could be the start of a virtuous cycle for economic growth, but it is still too early to say whether this will happen. We probably need another six to 12 months to see where we are on that front.”
A premature increase in interest rates could hurt growth, while an excessive delay in tightening monetary policy would further weigh on the Japanese yen and increase the risk of financial fragility.
Any delay would also increase pressure on Japanese Prime Minister Fumio Kishida, who promised in a Cabinet reshuffle last week to help consumers cope with the rising cost of living. He also pledged to ensure that the world’s third-largest economy meaningfully emerges from deflation with wage growth that consistently exceeds the rate of inflation.
Japan’s gross domestic product growth for the April-June quarter was revised down from the preliminary estimate of 6% to an annualized 4.8% due to weak capital spending.
While the output gap widened 0.4% in the second quarter, widening for the first time in 15 quarters, mixed domestic economic data and an uncertain global economic outlook have made the situation more complex for policymakers.
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