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BOJ holds fire on policy, but joins Fed in warning of mounting global risks

It is keeping its short-term rate target at -0.1% and will keep buying government bonds, but half the analysts polled are expecting it to ease monetary policy further down the road

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For the moment, analysts expect the Bank of Japan in Tokyo (above) to strengthen its forward guidance and pledge to keep current ultra-low rates longer than it promises.

Tokyo

THE Bank of Japan (BOJ) kept monetary policy steady on Thursday, preferring to save its dwindling ammunition as a gloomy global growth outlook nudges other major central banks to hint at additional stimulus.

But the BOJ stressed anew that global risks were increasing as trade tensions and uncertainty over US economic policies jolt financial markets, signalling that it, too, is leaning more toward ramping up - not whittling down - monetary support.

As widely expected, the central bank maintained its short-term rate target at -0.1 per cent and a pledge to guide 10-year government bond yields around zero per cent. It also kept intact a loose pledge to keep buying government bonds so the balance of its holdings increase by roughly 80 trillion yen (S$1 trillion) per year.

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The BOJ said in a statement announcing the policy decision: "Downside risks regarding overseas economies are big, so we must carefully watch how they affect Japan's corporate and household sentiment."

Central banks across the globe are tilting towards easing as the escalating US-China trade war adds pressure on the slowing world economy. The US Federal Reserve kept interest rates steady on Wednesday, but signalled it was ready to battle risks by cutting rates beginning as early as next month. With this more dovish outlook, the yen strengthened against the weakened dollar.

Australia's top central banker on Thursday said it was not "unrealistic" to expect a further reduction in rates, given ample slack in the labour market. It cut rates to a record low earlier this month.

Many Japanese policymakers, however, are wary of expanding stimulus any time soon, as years of heavy money printing have left them with little ammunition.

Some analysts say the BOJ could strengthen its forward guidance and pledge to keep current ultra-low rates longer than it promises to do so now if future Fed rate cuts trigger an unwelcome yen spike that hurts Japan's exports.

Izuru Kato, chief economist at Totan Research, said: "There's a good chance the Fed will cut rates in July. If that happens, the BOJ will strengthen its forward guidance to keep yen rises in check. The BOJ's next move will depend on how the US economy performs and how Washington's trade war with China progresses."

At its previous rate review in April, the BOJ adopted a forward guidance that pledges to keep current ultra-low rates at least until around spring of next year.

Japan's economy expanded by an annualised 2.1 per cent in Q1, but many analysts predict growth to slow in coming quarters as the US-China trade row hurts global trade.

A scheduled sales tax hike in October may also curb consumption. Annual core consumer inflation hit 0.9 per cent in April, remaining distant from the BOJ's 2 per cent target, despite years of major, radical stimulus.

A Reuters poll released this week showed expectations of the BOJ's next move have shifted amid growing concerns about the economic outlook. For more than two years, a majority of economists surveyed have said its next policy change would be to tighten the money taps with an eye to "normalising" settings that have long been at crisis levels.

But now, half the analysts polled in early June said the BOJ's next step would be to ease even further. REUTERS

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