Daily Management Review

As Inflation Clouds Recovery, BOJ To Keep Ultra-Low Rates And A Dovish Posture


As Inflation Clouds Recovery, BOJ To Keep Ultra-Low Rates And A Dovish Posture
With increasing costs of raw material force it to focus on maintaining a economic recovery that is still fragile, the Bank of Japan is expected to retain ultra-low interest rates and refrain from making major changes to its dovish policy stance on Thursday.
Although inflation in Japan is likely to creep up towards the central bank's 2 per cent objective, the BOJ's steadfast commitment to its zero-rate policy puts it at odds with major central banks that are leaning toward tighter monetary policy.
Surge in inflation, on the other hand, is pressuring the US Federal Reserve and the European Central Bank to withdraw stimulus implemented during the COVID-19 pandemic.
The possibility of aggressive Fed tightening, which would increase the interest rate differential between the US and Japan, has pushed the yen to two-decade lows against the dollar.
Some politicians fear that additional yen depreciation will do more harm than good to the economy by boosting import costs, thus speculation has been rife that the BOJ will allow long-term rates to rise even more or change its policy direction to counteract yen depreciation.
The BOJ, however, is not in a hurry to raise borrowing costs or modify a pledge to keep rates at current or lower levels, according to sources familiar with its thinking. Inflation is low compared to other countries, and the economy is still below pre-pandemic levels, so the BOJ is not in a hurry to raise borrowing costs or modify a pledge to keep rates at current or lower levels.
"The output gap in Japan is negative, and there is still a long way to go to achieve the 2% target in a stable manner," BOJ Governor Haruhiko Kuroda said in a speech on Friday.
"The Bank's role in the current context is perfectly clear: to persistently continue with the current monetary easing centered on yield curve control."
The BOJ is largely likely to keep its short-term rate target of -0.1 percent and its 10-year bond yield objective of 0 percent during a two-day policy meeting that ends on Thursday.
The central bank is anticipated to lift its inflation projection for this fiscal year to roughly 2% in new quarterly forecasts due following Thursday's meeting, reflecting rising gasoline costs.
However, due to weaker demand, the BOJ is likely to lower its growth forecast for this year and forecast that prices will decline next year and beyond, as it sees current cost-push inflation as temporary.
Markets will be looking for signals from Kuroda's post-meeting news conference about whether and when the BOJ would change its dovish policy direction.
The BOJ says it "won't hesitate to take additional easing moves" and expects short- and long-term policy rates to "stay at their current or lower levels" under current guidelines.
Some analysts believe the BOJ could change its direction to a more neutral position as soon as Thursday's meeting. find out more
In his speech on Friday, Kuroda stated that there is no need to increase stimulus and that future policy will be data-driven and "nimble."
Analysts believe that any adjustment in the guidelines will be minor and will not result in quick monetary tightening.
"We don't expect the BOJ to adjust yield curve control this time, as it focuses on risks to the economy rather than rising inflation," said Hiroshi Ugai, chief Japan economist at JPMorgan Securities, who predicts the central bank could tweak the guidance on Thursday.