BOJ keeps ultra-loose policy, dovish guidance on outlook

TOKYO – The Bank of Japan on Friday maintained ultra-low interest rates and its pledge to continue supporting the economy until inflation sustainably reaches its 2 percent target, signaling it was in no hurry to wind down its massive stimulus program.

Markets are closely watching Governor Kazuo Ueda’s comments for clues as to how quickly the bank could unwind its predecessor’s massive stimulus program, as the U.S. central bank and others indicate they may continue to raise borrowing costs for longer to to curb price pressure.

As widely expected, the BOJ maintained its short-term interest rate target at -0.1 percent and the 10-year bond yield at around 0 percent during a two-day meeting that ended Friday.

A margin of 50 basis points either side of the return target was also left unchanged, as was a new hard limit of 1 percent adopted in July.

In its statement, the BOJ said it expects the economy to continue to recover moderately and inflation expectations to show new signs of rising.

“We have yet to foresee inflation reaching our price target in a stable and sustainable manner – which is why we must patiently maintain an ultra-loose monetary policy,” Ueda said at a briefing after the decision.

“That said, we will of course change policy if we can achieve our target… Since we published the July outlook report, inflation has not overshot sharply. But it doesn’t slow down as much as we expected.”

The BOJ’s decision is in stark contrast to those of the US and European central banks, which have signaled their determination at recent meetings to keep borrowing costs high to rein in inflation.

The central bank made no change to its forward guidance, which retained a pledge to “take additional easing measures without hesitation” – language that some market participants thought might have been changed to strike a more neutral tone.

With inflation exceeding the BOJ’s 2 percent target and the yen on the decline again, markets are focusing on any signals Ueda might drop about the timing of a policy change.

Data on Friday showed core inflation in Japan reached 3.1 percent in August, remaining above the central bank’s 2 percent target for the 17th straight month, a sign of rising price pressures in the world’s third-largest economy world.

In a move seen by markets as a step toward an exit, the BOJ loosened its grip on long-term interest rates in July, allowing them to rise more freely.

Ueda said in a recent interview that the BOJ could have enough data by the end of the year to determine whether to end negative interest rates, raising market expectations of a near-term policy change.

A Reuters poll for September showed most economists predicting an end to negative rates in 2024. The prospects of a rate hike helped push Japanese 10-year government bond yields to a new decade high on Thursday.

The BOJ faces several challenges in winding down former Governor Haruhiko Kuroda’s radical stimulus measures, including weak signals in the global economy and the risk of a spike in bond yields that would raise the cost of financing Japan’s massive sovereign debt.

BOJ officials, including Ueda, have also stressed the need to maintain an accommodative policy until they are confident that inflation will stably reach 2 percent, driven by solid consumption and wage growth, and not by temporary factors such as global oil prices.

But some analysts see the yen, rather than wage growth or inflation, as the main trigger for BOJ action.

Growing prospects for longer US yields have pushed the yen lower towards the 150 per dollar level, seen as Tokyo’s line in the sand for possible currency intervention.

The yen’s renewed decline has prompted fresh verbal warnings from government officials, increasing pressure on the BOJ to play its role in easing the pain from rising import costs.