Bank of Japan to keep ultra-low interest rates, defy global tightening trend

TOKYO – The Bank of Japan is set to keep ultra-low interest rates on Friday and remind markets it will remain a dovish outlier among a wave of central banks tightening monetary policy, as global recession fears dampen prospects for a solid economic recovery.

Any such decision could drive the yen to fresh 32-year lows by drawing market attention to the widening divergence with U.S. and European central banks, which are eyeing further rate hikes.

The European Central Bank raised interest rates again on Thursday, continuing its efforts to prevent rapid price growth from becoming entrenched. The U.S. Federal Reserve will hold its rate-setting meeting next week.

In fresh quarterly projections, the BOJ will slightly revise up its price forecasts but still project inflation to slide back below its 2 percent target next fiscal year as commodity and fuel price rises peak, sources told Reuters.

The nine-member board is likely to cut its growth forecasts for this year and next, the sources said, as the fallout from global monetary tightening and China’s sharp slowdown weigh on Japan’s export-reliant economy.

The revised projections are likely to reinforce market expectations the BOJ will stay the course in underpinning a fragile recovery with ultra-low interest rates, analysts say.

“Fundamentally the BOJ won’t change course anytime soon,” due to the need to stimulate demand, said Hiroyuki Ueno, senior economist at SuMi Trust in Tokyo.

“With a recession on the cards in Europe and the U.S., export-oriented Japanese companies are prepared for a fall in corporate earnings,” he said.

At the two-day meeting ending on Friday, the BOJ is widely expected to maintain its -0.1% target for short-term interest rates and a pledge to guide the 10-year bond yield around 0%.

Investor attention will be focused on Governor Haruhiko Kuroda’s post-meeting briefing for clues on the timing of an eventual exit from the ultra-loose policy.

In July, the BOJ forecast core consumer inflation to hit 2.3 percent in fiscal year ending March 2023 before slowing to 1.4 percent the following year. It projects the economy to expand 2.4 percent in the current fiscal year and rise 2 percent in the next.

While more modest than other major economies, Japan’s core consumer inflation hit an eight-year high of 3% in September, exceeding the BOJ’s 2 percent target for six straight months.

Core consumer inflation in Japan’s capital Tokyo, considered a leading indicator of nationwide figures, hit a 33-year high of 3.4 percent in October, data showed on Friday, in a sign of broadening price pressure.

Kuroda has stressed the need to maintain ultra-loose policy on the view the recent cost-push inflation will prove temporary.

The BOJ’s ultra-easy policy has helped trigger sharp yen declines that inflate the cost of importing already expensive fuel and raw material, prompting the government to intervene in the market to prop up the currency.