Bank of Japan leaves interest rates unchanged amid gloomy outlook

[TOKYO] The Bank of Japan left its main policy unchanged after forecasting the economy will regain more lost growth than previously thought once it starts to recover from the current state of emergency.

The BOJ held its interest rate and asset buying settings intact, according to a statement from the central bank on Thursday. All 44 economists surveyed by Bloomberg predicted no change in the bank's main policy levers ahead of a policy review in March.

While the bank took a gloomier view of the current state of the economy as record cases of Covid-19 keep a state of emergency in place, the BOJ concluded that weaker growth at the end of the current fiscal year and a government stimulus package announced last month will result in a stronger rebound in the year starting April.

"The growth outlook, especially for fiscal 2021, has been lifted somewhat considering the impact of the government's economic policy," BOJ Governor Haruhiko Kuroda said at a briefing after the board met. "There is a high degree of uncertainty, though, because the outlook can change with the trajectory of the pandemic."

Ahead of the meeting, economists had taken the view that the bank would likely hold off on any action until it completes a review of policy at its next gathering in March. By then the economic landscape and the trajectory for the pandemic should be much clearer.

Markets showed scant reaction to the largely in-line outcome of the meeting, with stocks and the yen little changed from levels before the decision.

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Shortly after the BOJ's decision, Prime Minister Yoshihide Suga's administration nominated another reflationist to the central bank's board, helping to ensure policy continuity.

The nominee, sixty-three-year-old economist Asahi Noguchi has ties with the board, having co-authored a 2007 book on economic policy with sitting BOJ deputy governor Masazumi Wakatabe, along with well-known Abenomics proponent Koichi Hamada.

Currently about 60 per cent of the economy is subject to advisories that mainly call for reduced activity in the evenings after Mr Suga widened the state of emergency beyond the Tokyo region to include most of Japan's other business hubs.

The BOJ has concentrated its efforts during the pandemic on ensuring businesses have access to cash and keeping markets stable. Its relative success so far and the prospect of vaccine distribution over the coming months gave it enough breathing room to monitor developments for now.

Still, the bank's gloomier view of the country's immediate economic health, and its downside risks, adds to evidence the bank is a long way from the cautious optimism of some of its global peers. Some Federal Reserve officials see the possibility of a much stronger US rebound once vaccines are widely delivered.

The gap in perceptions may help relieve some upward pressure on the yen. The currency hit a nine-month high against the dollar earlier this month, pushing Japanese exporters closer to loss-making levels when they are already facing lower demand amid the pandemic.

In its quarterly outlook report, the bank said the economy is picking up "as a trend." The BOJ delivered that assessment after a report earlier Thursday showed demand from China, which has managed to contain the virus and last quarter roared back to pre-pandemic growth rates, last month drove the first year-on-year gain in Japanese exports since late 2018.

The shipments gain is positive sign, but even continued increases probably won't be enough to offset the damage to Japan's service sector amid the renewed emergency.

With Thursday's policy decision done, the focus now shifts squarely to the March policy review. Mr Kuroda has made clear he isn't considering a major overhaul, but at the briefing he signaling a willingness to make changes to make policy more agile.

"We need to be able to respond flexibly whenever there's change in the economy, prices and financial conditions," Mr Kuroda said. "Given that it's expected monetary easing will become long term, we need to increase policy sustainability."

BLOOMBERG