Daily Management Review

Bank Of Japan Maintains Rates At Current Levels Due To "Extremely High Uncertainties"


Bank Of Japan Maintains Rates At Current Levels Due To "Extremely High Uncertainties"
Given the "extremely high uncertainties" surrounding the prospects for both domestic and international development, the Bank of Japan kept its ultra-loose monetary policy and left interest rates unchanged on Friday.
The Bank of Japan announced in a policy statement following its meeting in September that it would keep short-term interest rates at -0.1% and, as was generally anticipated, cap the yield on 10-year Japanese government bonds at zero.
“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,” the Bank of Japan said in its policy statement Friday.
However, Japan stands apart among other major central banks, which have hiked interest rates in the last two years to control spiralling inflation, due to the ultra-loose monetary policy of the Japanese central bank.
The Japanese yen dropped by 0.5% to roughly 148.3 against the dollar after Friday's announcement, while 10-year Japanese government bond yields remained relatively steady, in part due to this policy divergence between the BOJ and the rest of the world. By already this year, the yen has lost more than 11% of its value against the US dollar.
“Comments from the BOJ Governor seems to reveal a continued lean into the dovish camp, at least for now, which led recent hawkish bets to question if they have got ahead of themselves,” said Yeap Junrong, a market strategist with IG Asia in Singapore.
“Some uncertainty over economic outlook and still wanting to see more on the ‘sustainable 2% inflation’ condition for a policy pivot still seem to suggest little urgency from the central bank in terms of a quicker step towards policy normalization,” he added.
The BOJ's choice of course A week that ended on Friday saw a rush of other central bank policy announcements, including the U.S. Federal Reserve's promise to maintain high rates for longer and the Bank of England's decision to halt its streak of 14 consecutive interest rate increases.
We will think about eliminating YCC or revising the negative interest rate when we anticipate that inflation will reach 2% steadily and consistently.
As Governor Kazuo Ueda's first policy adjustment since taking office in April, the BOJ relaxed its control over the yield curve at its most recent policy meeting in July to allow longer-term rates to move more in step with rising inflation.
“Since we published the July outlook report, inflation isn’t overshooting sharply. But it’s not slowing as much as we expected,” Ueda said at a press conference Friday, in a translation provided by Reuters.
“When we can foresee inflation stably and sustainably hitting 2%, we will consider ending YCC or revising negative interest rates,” he added.
A policy tool called the yield curve control, or YCC, allows the central bank to set an interest rate objective and then buy and sell bonds as needed to accomplish it.
The decision to increase the allowed range for 10-year JGB yields from its 0% objective to 1% was considered as the beginning of a gradual shift away from the yield curve control policy implemented by Ueda's predecessor.
After Ueda stated to Yomiuri Shimbun in an interview published on September 9 that the BOJ could have enough data by the end of this year to determine when it could end negative rates, many economists revised their predictions for a quicker exit from the BOJ's ultra-loose monetary policy to sometime in the first half of 2024.
“It wasn’t as if any time frame for achieving our price target had changed. I thought that by ruling out the possibility completely would bind the discussion of upcoming policy-setting meetings,” Ueda said Friday.
“I think where their hand could be forced is looking at dollar-yen,” Bob Michele, global head of fixed income at JP Morgan Asset Management, told CNBC Thursday before the rate decision.
“We’re awfully close to 150 ... when that starts to get to 150 and higher, then they have to step back and think: the selloff in the yen is now starting to import probably more inflation than we want,” he added.
Core inflation has been higher than the Bank of Japan's stated 2% objective for 17 straight months, but officials have been hesitant to end the dramatic stimulus that was implemented to counter decades of deflation in the third-largest economy in the world.
This is because there hasn't been enough sustained inflation, according to the BOJ, which it attributes to meaningful wage rise that would, in turn, drive household spending and economic growth.
“For Japan to stably and sustainably achieve 2% inflation, we need to see strong demand support inflation. We need to confirm that a positive wage-inflation cycle has kicked off. This is where we still need time. Trend inflation is still somewhat short of 2%,” Ueda said.
“We’re seeing heightening inflation expectations, or a change in corporate behaviour,” he added. “In the past, it was hard for companies to hike prices. But as more and more companies began raising prices, those who were hesitant are starting to follow suit. We’re scrutinising developments at each policy meeting, but I think the peak (of price hikes) is nearing.”
Prior to the BOJ's policy announcement on Friday, core inflation, which includes oil products but excludes volatile fresh food prices, came in at 3.1% year over year in August. Consumer prices rose 4.3% over the previous year, excluding energy and fresh food.
The Bank of Japan has identified a number of variables as significant inflation drivers, including wage growth, price expectations, and the output gap, which gauges the discrepancy between an economy's actual and potential output.
“Japan has the best chance in a generation to move from a deflationary environment to one that is a bit more inflationary and one which has a degree of permanence,” said Oliver Lee, client portfolio manager at Eastspring Investments.
“The key thing is wages. Japan needs to see meaningful and sustained wage inflation, which can have a psychological impact on consumption,” he said. “Hopefully this could be the start of a virtuous cycle for economic growth, but it’s still too early to say whether that will pan out. We probably need another six to 12 months to see where we are on that front.”
Major Japanese businesses negotiate pay increases with unions every March in a procedure known as "shunto." After the major labour unions and companies reached an agreement on a 3.8% wage increase this year, the most since 1993, much will depend on negotiations in 2024.
“Big firms’ outcome will start streaming in around January-March, followed by other firms. We’ll need to look at factors that affect the wage negotiations,” said Ueda.
Prematurely increasing interest rates could stymie economic growth, but protracted policy tightening would put additional pressure on the Japanese yen and increase the likelihood of financial instability.
Any delay would increase the pressure on the Japanese prime minister, Fumio Kishida, who last week during a cabinet reshuffle promised to assist consumers in coping with growing living expenses. In addition, he promised to make sure that the third-largest economy in the world continually has wage growth that is higher than the rate of inflation.
Due to low capital spending, Japan's gross domestic product growth for the April–June quarter was revised down from the initial 6% print to an annualised 4.8%.
Although the production gap increased by 0.4% in the second quarter, the first increase in 15 quarters, inconsistent domestic economic statistics and a hazy picture for the global economy have complicated the situation for policymakers.