The Bank of Japan maintained its ultra-low interest rate policy on Thursday to support the pandemic-hit economy, as widely expected, and maintained a moderate stance despite the yen’s sharp drop in a global policy tightening wave triggered by rising inflation.
Following the policy decision, the yen broke the psychologically significant level of 145 against the US dollar, and Governor Haruhiko Kuroda ruled out rate hikes for the foreseeable future. To stop the yen’s relentless decline, Japan intervened in the foreign exchange market by buying the yen for dollars for the first time since 1998.
The effect of such a unilateral act is questionable, market analysts say, as the yen’s recent rapid devaluation to its 24-year low reflects the widening gap between Japanese and US interest rates.
Underscoring its moderate propensity, the BOJ decided in a two-day policy meeting to keep short-term interest rates at minus 0.1 percent and continue to drive 10-year Japanese government bond yields near zero percent. It also retained its promise to take further easing measures without hesitation should such a need arise.
Bank of Japan Governor Haruhiko Kuroda attends a press conference at the BOJ headquarters in Tokyo on Sept. 22, 2022, after the central bank decided to maintain its ultra-low interest rate policy despite the yen’s sharp drop in a global policy-tightening wave caused by rising inflation .(Pool photo) (TBEN) ==TBEN
Fed continues aggressive rate hikes to fight inflation
The Federal Reserve raised its benchmark interest rate by 0.75 percentage point on Wednesday, while the main central banks in Europe have also tightened their policy.
When the Swiss National Bank decided on Thursday to end its negative interest rate policy, only the BOJ remained in a phase of unconventional monetary stimulus at the world’s leading central banks.
“There is no change in our position to maintain monetary easing. We do not plan to raise interest rates for the time being,” Kuroda told a news conference after the meeting.
It is “natural” that Japan’s monetary policy differs from that of the United States and Europe, where inflation is much higher, Kuroda said. “Just because it ends in another country doesn’t mean our negative interest rate has to end as well.”
The yen’s slump has caused a headache for scarce Japan by driving up import costs, but it is also boosting exporters’ overseas profits in yen terms.
Kuroda, a former top Japanese currency diplomat, said the recent volatility cannot be explained solely by the differences in interest rates between Japan and the US, pointing to “unilateral” and “speculative” moves.
The possibility of buying yen and selling dollars by Japanese authorities had left foreign exchange participants wary after the BOJ made inquiries with dealers about dollar and yen trading in an “interest check” that was seen as a harbinger of actual intervention. The central bank carries out interventions for the government.
Speaking at Thursday’s press conference before the intervention, Kuroda explained that the current policy is appropriate because consumer inflation, which rose 2.8 percent in August, is almost certain to slow and fall below the 2 percent target in the United States. next fiscal year from April. Recent cost inflation is unfavorable, he added.
The BOJ statement released after the meeting said it “expects key interest rates to remain at current levels or lower in the short and long term.”
Kuroda sparked market speculation that the BOJ would change its policy guidelines in the near future, saying it won’t happen for a while.
“When I say ‘for the time being’ I don’t mean two or three months. I’m talking about two or three years.”
The yen rose sharply after Japan’s intervention, trading briefly in the 140 zone against the dollar. Before the rare move, Kuroda said the recent rapid weakening of the yen increased uncertainty for Japanese companies and was “negative” for the economy.
Mari Iwashita, chief economist at Daiwa Securities Co., said Thursday’s decision reinforced views that the BOJ is unlikely to budge until Kuroda’s term ends next year, while the government continues to support its monetary policy stance.
“Yen levels are not a concern for the BOJ or Mr. Kuroda. Going against the yen’s depreciation is tantamount to denying its policy over the years to stimulate the economy using the weakness of the yen. the yen,” Iwashita said. “The Treasury Department and the BOJ may be on different alert levels.”
The BOJ will continue to buy exchange-traded funds with a maximum buying limit of 12 trillion yen ($83 billion) per year. According to the statement, the current pandemic emergency response program to support financially struggling smaller businesses will be extended beyond the end of September before being phased out.
The BOJ faces the formidable task of justifying its moderate stance. The ultra-low interest rate policy aims to support the still sluggish economic recovery from the effects of COVID-19 and to achieve inflation in a stable and sustainable manner, accompanied by robust wage growth.
But the policy also risks a further decline in the yen, leading to higher prices of imported energy, food and other commodities. The country’s headline inflation rate has remained above the 2 percent target for five straight months and economists expect it to top 3 percent by the end of this year.
Prime Minister Fumio Kishida has supported the BOJ’s efforts to meet its inflation target with monetary easing.
The Japanese economy has “scrabbled up” with progress in resuming economic activity and is likely to continue its recovery as the impact of COVID-19 and supply constraints ease, the BOJ said. It warned of downside risks from rising commodity prices and said “extremely large uncertainties” remain about the outlook.
Overseas economies have recovered moderately, but slowdowns have been observed in advanced economies, the statement said after the meeting, amid mounting market concerns that aggressive rate hikes will hamper growth.
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