Bank of Japan Maintains Ultra-Loose Policy and Leaves Rates Unchanged Amid Uncertain Growth Outlook

Japan’s central bank, the Bank of Japan, decided to maintain its ultra-loose policy and keep interest rates unchanged on Friday. This decision comes as the bank acknowledges the “extremely high uncertainties” in both domestic and global economic growth.

In their policy statement after the September meeting, the Bank of Japan confirmed that short-term interest rates would remain at -0.1% and that they would cap the 10-year Japanese government bond yield at around zero, as expected.

The bank stated, “With extremely high uncertainties surrounding economies and financial markets at home and abroad, the Bank will patiently continue with monetary easing, while nimbly responding to developments in economic activity and prices as well as financial conditions.”

During the previous policy meeting in July, the Bank of Japan adjusted its yield curve control policy to allow longer-term rates to move in line with rising inflation. This change was made under Governor Kazuo Ueda, who took office in April.

The yield curve control policy involves the central bank targeting an interest rate and buying or selling bonds accordingly to achieve that target.

The Bank of Japan’s decision to broaden the permissible range for 10-year Japanese government bond yields was seen as the beginning of a gradual departure from the yield curve control policy implemented by Governor Ueda’s predecessor.

Many economists have adjusted their forecasts, expecting a quicker exit from the Bank of Japan’s ultra-loose monetary policy sometime in the first half of 2024. This shift follows a statement by Governor Ueda in an interview with Yomiuri Shimbun, where he mentioned that the bank may have enough data by the end of this year to determine when negative rates could be ended.

Despite core inflation consistently exceeding the Bank of Japan’s 2% target for 17 consecutive months, officials remain cautious about exiting the ultra-loose policy. The policy was put in place to combat decades of deflation in Japan, and the bank believes sustainable inflation requires meaningful wage growth, which would support household consumption and economic growth.

In August, core inflation, which excludes volatile fresh food prices but includes oil products, reached 3.1%, aligning with the Bank of Japan’s projections. Wage growth, output gap, and price expectations are among the factors prioritized by the bank as drivers of meaningful inflation.

Oliver Lee, client portfolio manager at Eastspring Investments, noted that Japan has a unique opportunity to transition from a deflationary environment to a more inflationary one, emphasizing the importance of sustained wage inflation for consumption and overall economic growth.

Prematurely raising interest rates could negatively impact growth, while excessively delaying tightening policy would further weigh on the Japanese yen and increase the risks of financial fragility. A delay in tightening policy would also put additional pressure on Japanese Prime Minister Fumio Kishida, who recently pledged to assist consumers in coping with rising living costs and ensure Japan’s emergence from deflation with consistent wage growth that outpaces inflation.

Japan’s gross domestic product growth for the April-June quarter was revised down due to weak capital spending, and although the output gap showed improvement, uneven domestic economic data and an uncertain global economic outlook complicate policy decisions for the Bank of Japan.

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