BOJ’s new boss keeps ultra-low rates, embarks on policy review

Bank of Japan Governor Kazuo Ueda participates in a news conference at the Fairmont Washington D.C. Georgetown hotel in Washington, U.S., April 13, 2023. REUTERS/Elizabeth Frantz/File photo

TOKYO  – The Bank of Japan (BOJ) on Friday kept ultra-low interest rates but announced a broad review of its monetary policy, laying the groundwork for new Governor Kazuo Ueda to gradually phase out his predecessor’s massive stimulus program.

As widely expected, the BOJ made no changes to its yield curve control (YCC) policy that sets a short-term interest rate target of -0.1 percent and that for the 10-year bond yield around zero.

But the central bank modified its guidance on the future policy path and removed a pledge to keep interest rates at “current or lower levels.”

Instead, the BOJ said it will “patiently continue with monetary easing” given “extremely” high uncertainty surrounding the economy.

The BOJ also said it would look into various monetary easing measures taken over the past 25 years to beat deflation and their impact on the economy and prices.

“The Bank has decided to conduct a broad-perspective review of monetary policy, with a planned time frame of around one to one-and-a-half years,” it said in a statement announcing the policy decision.

While the review could open scope for a future tweak to the BOJ’s prolonged ultra-loose policy, some analysts said its long timeframe could mean any change will be slow in forthcoming.

Inflation forecast

The yen hit a one-week low against the dollar, while Japanese government bonds rallied as investors seemed to discount the prospect of monetary tightening any time soon.

“The BOJ did upgrade the inflation forecasts, but at the same time, I think the hopes of a policy change have been somewhat dampened by the review, which is expected to last one to one-and-a-half years,” said Moh Siong Sim, currency strategist at Bank of Singapore. “That might have dampened hopes of an imminent move in the policy setting.”

In fresh quarterly projections released on Friday, the board revised up its core consumer inflation to 1.8 percent in the current fiscal year ending in March 2024, and 2.0 percent in the following year, the report showed.

Under previous projections made in January, the BOJ expected inflation to hit 1.6 percent this year and 1.8 percent in fiscal 2024.

But the board projected inflation to slow to 1.6 percent in fiscal 2025 and said risks to that price outlook were skewed to the downside, suggesting the BOJ will be in no rush to hike rates.

Markets are focusing on Ueda’s post-meeting news conference for clues on how soon the BOJ could phase out stimulus.

Broadening inflation pressures could test Ueda’s communication skills by casting doubt over the BOJ’s argument recent cost-driven price pressures will soon peter out.

Core consumer inflation in Japan‘s capital hit 3.5 percent in April, beating expectations and exceeding the BOJ’s 2 percent target, while an index stripping away fuel costs rose at the fastest pace in four decades, data showed on Friday.

The BOJ’s forceful defense of an implicit 0.5 percent cap set for the 10-year bond yield has drawn criticism for distorting the shape of the yield curve and draining bond market liquidity, heightening expectations that Ueda will soon phase out YCC.

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