Title: Bank of Japan Maintains Ultra-Low Interest Rates as Core Inflation Hits 3.1%
Subtitle: BOJ’s Decision Confirms No Rush to Phase Out Stimulus Program
TOKYO, Sept 22 (Reuters) – The Bank of Japan (BOJ) announced on Friday that it would keep ultra-low interest rates unchanged and continue supporting the economy until inflation sustainably reaches its 2% target. This decision indicates that the BOJ is not yet ready to withdraw its massive stimulus program, in contrast to recent moves by central banks in the United States and Europe to curb inflation by increasing borrowing costs.
Governor Kazuo Ueda highlighted the unexpected rise in prices by Japanese companies, which prevented inflation from slowing. He suggested that conditions for scaling back monetary support were gradually falling into place. However, Ueda emphasized the need for more time to assess crucial data such as wages and service prices before considering an interest rate hike.
Ueda stated, “We have yet to foresee inflation stably and sustainably achieving our price target. That’s why we must patiently maintain ultra-loose monetary policy.” He added, “Having said that, we will, of course, shift policy if the achievement of our target is foreseen.”
During the two-day meeting that concluded on Friday, the BOJ kept its short-term interest rate target at -0.1% and retained the target for the 10-year bond yield around 0%. It also maintained an allowance band of 50 basis points either side of the yield target, as well as a new hard cap of 1.0% set in July. The central bank did not alter its forward guidance, which promises to “take additional easing measures without hesitation” if necessary.
Ueda’s remarks caused the yen to sharply decline, with a temporary dip to 148.32 against the dollar, resulting in a depreciation of more than 11% this year.
Alvin Tan, the head of Asia FX strategy at RBC Capital Markets, commented, “I think it’s rather dovish, and that’s why we’ve seen the yen go past 148.”
While Japan’s core inflation remained above the BOJ’s 2% target for the 17th consecutive month in August, policymakers insist that it may be transitory due to factors like global oil prices and may not reflect a firm recovery in economic activity.
Speculation about the BOJ ending negative interest rates and its yield cap has been prevalent in the markets. Ueda’s recent interview, where he mentioned having enough data by year-end to decide whether to end negative rates, further heightened expectations of a near-term policy shift.
Ueda, however, brushed aside such interpretations, explaining that numerous uncertainties made it difficult to determine the timing of an exit.
“We need to see strong demand support inflation for Japan to achieve 2% inflation sustainably. We need to confirm that a positive wage-inflation cycle has started. This is where we still need time,” Ueda stated.
Norihiro Yamaguchi, senior economist at Oxford Economics, predicts that the BOJ will maintain the status quo until at least the middle of next year to carefully evaluate whether the 2% inflation target can be achieved during Ueda’s five-year term.
Although keeping ultra-low rates has its downsides, such as the weakening of the yen and the potential impact of import costs on consumer spending, Ueda reiterated the importance of stable currency movements and their influence on economic and price developments.
“We’re monitoring currency moves carefully from the standpoint that they affect inflation,” he concluded.
Reporting by Leika Kihara, Editing by Sam Holmes and Kim Coghill