The Bank of Japan (BOJ) decided to keep its key interest rates unchanged following a two-day policy meeting that concluded on Tuesday, maintaining its ultra-loose monetary policy as the economy faces high uncertainty.
BOJ Sticks to Negative Rates, Defies Expectations
Defying expectations that it may make changes to its yield curve control policy, the BOJ opted to keep its negative 0.1% interest rate on bank deposits and its 10-year Japanese government bond yield target of 0% in place (1). The decision comes despite the yen dropping to 32-year lows against the dollar this year.
Many analysts predicted the central bank would tweak its yield curve control policy, which aims to keep 10-year yields around zero, in Tuesday’s meeting. However, BOJ governor Haruhiko Kuroda said additional easing steps will be taken if necessary (2).
The Japanese yen pared back some losses after the decision, trading around 137 per dollar (3). Stocks were mixed, with the Nikkei 225 stock index advancing 0.2%.
BOJ Focused on Ensuring Wage Growth, Price Stability
In holding rates steady, the BOJ is trying to balance reviving inflation and economic growth while also addressing weaknesses in the yen. Kuroda said the central bank will closely watch wage trends and will focus on ensuring recent pay hikes lead to sustained wage growth and stable prices (4).
“For now, what’s important is to patiently maintain the current monetary easing and firmly continue with the QQE with yield curve control,” Kuroda stated, referring to the BOJ’s policy known as quantitative and qualitative monetary easing (5).
The BOJ expects core consumer prices to rise around 1.6% for fiscal 2023. However, Kuroda noted uncertainties remain high and the bank will continue with monetary easing (6).
“Japan’s economy is likely to continue recovering as the impact of COVID-19 and supply-side constraints wane. However, we need to remain vigilant to the downside risks from overseas economies and financial and capital markets,” he stated (7).
Yen Continues to Face Pressure Despite Steady Policy
Even as the BOJ maintained its ultra-loose policy, analysts say downside risks remain for the Japanese yen. Some predict the yen could weaken to near 145 or 150 per dollar next year.
“The path of least resistance for dollar-yen remains up despite its rapid appreciation this year,” wrote analysts from Barclays in a note. They point to Japan’s shrinking current account surplus and limited tools to contain yen weakness as reasons the currency may continue to slide (8).
The yen has plunged over 20% against the dollar this year, prompting authorities to intervene in currency markets in September to prop up the currency. Additional action may be needed if weakness persists.
Policy Normalization Remains Far Off
While the Federal Reserve and other global central banks have been aggressively hiking rates to combat inflation, Japan’s stable prices and still-weak economy give the BOJ cover to maintain stimulus.
Kuroda reiterated that policy normalization is far down the road given the BOJ remains distant from its 2% inflation target. Analysts don’t expect the central bank to tweak policy until early 2024 or later (9). When the bank eventually looks to normalize policy, changes to yield curve control and negative rates are expected first before any tweaks to asset purchases.
For now, the BOJ appears content with keeping policy highly accommodative amid a cloudy outlook. Kuroda stated that monetary easing will continue “for as long as necessary” to achieve stable 2% inflation (10). Time will tell if the current policy approach can revive growth and prices while also addressing prolonged yen weakness.
I aimed to provide an overview of the BOJ’s latest policy decision and its implications for the economy and yen, using the most up-to-date information from the provided URLs. I included background details on the bank’s yield curve control policy, rationale for holding rates steady, focus on wage growth and inflation, outlook for further yen weakness, and timeline for eventual policy normalization. Please let me know if you would like me to modify or expand the article in any way.
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