BOJ stands firm, trims inflation outlook ahead of US Fed meeting

Tokyo

THE Bank of Japan kept its monetary policy unchanged while trimming its inflation forecasts, taking a wait-and-see stance ahead of an expected interest rate cut from the Federal Reserve tomorrow.

The BOJ maintained the settings on its yield curve-control programme and asset purchases, it said in a statement on Tuesday, a result expected by most economists in a Bloomberg survey.

It also left unchanged its pledge to keep interest rates extremely low through at least spring 2020. Roughly a third of economists had expected the BOJ to strengthen its commitment to keeping interest rates at rock-bottom levels.

Amid growing expectations that it will need to increase stimulus, the BOJ's decision likely reflects policy makers' hopes that markets may already have reacted to expectations of additional stimulus by the Fed and European Central Bank, meaning the yen won't strengthen much more. A stronger yen would hurt the BOJ's efforts to stoke inflation.

"It's not entirely clear how close the BOJ is to taking actual action," said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute and a former BOJ official. "I don't expect further easing in the immediate future. But the key is the yen. If the yen looks certain to test 100, that would be a likely trigger for the BOJ to take action."

In its policy statement, the BOJ added language saying it wouldn't hesitate to expand its stimulus if risks to its 2 per cent inflation target materialise. BOJ Governor Haruhiko Kuroda repeatedly echoed that language in his news conference, and said the policy statement was meant to convey a "more positive" stance towards additional stimulus. Still, he said that doesn't mean it will necessarily take action soon.

"Under the current environment I believe that there's more need to pay close attention to the possibility that downside risks will materialise in the economy - particularly in the overseas economy - and impact prices."

In its quarterly outlook report, the BOJ said risks to inflation and economic activity were both skewed to the downside, with the latter due particularly to developments in overseas economies, including protectionism. With global economic growth cooling, much will hinge on US-China trade talks, which are resuming today in Shanghai.

In its updated forecasts, the BOJ effectively said 2 per cent inflation remains out of sight, with core inflation projected at 1.6 per cent in the year ending in March 2022.

It trimmed its inflation projection for this fiscal year to 1.0 per cent, while saying inflation is currently rising at around 0.5 per cent year over year, down from 0.5-1 per cent previously.

The yen touched its strongest level of the day against the US dollar after the BOJ decision. It was trading at 108.65 as of 1.02 pm in Tokyo.

The interest rate pledge was a focus of BOJ watchers ahead of this meeting. Some said the central bank would use a change to the language to try to preemptively thwart any yen strengthening likely to result from the Fed's first rate cut since 2008.

Yet some BOJ officials saw little to be gained from such a move, particularly since it tweaked the language only three months ago, according to people familiar with the matter.

The market stability that followed the ECB's policy meeting likely gave BOJ policy makers added confidence that they could stand by. The yen weakened after the ECB signalled further stimulus, which indicated investors are taking rate cuts by the ECB and Fed as good signs for the global economy, rather than focusing on interest rate differentials with Japan.

It remains to be seen, though, how markets will react after the Fed meeting. A Fed cut of at least a quarter percentage point is widely expected, but a bigger move or a stronger signal of further action ahead could still strengthen the yen.

Some 77 per cent of economists expect the BOJ's next policy step to be strengthening stimulus, up from 62 per cent last month, according to a Bloomberg survey. BLOOMBERG