BOJ’s Ueda scraps rates guidance, commits to stimulus for now
THE Bank of Japan (BOJ) scrapped its guidance on future interest rate levels while keeping its main stimulus measures unchanged as Governor Kazuo Ueda prepared the ground for taking a more neutral stance on policy.
The BOJ maintained its rock-bottom interest rate and asset purchase settings at the end of a two-day gathering on Friday (Apr 28), as expected by almost 90 per cent of economists surveyed by Bloomberg.
The central bank also called for a long-term review of its policies and issued new price forecasts that show inflation below 2 per cent again in the fiscal year ending March 2026.
The decision to keep stimulus in place in pursuit of stronger inflation keeps BOJ in a very different place to its price-fighting global peers. While the wave of policy tightening around the world to weaken inflation looks close to peaking, the Federal Reserve still looks set to push up borrowing costs further when it meets next week.
That possibility still seems a long way off for BOJ, given a reiterated commitment in Friday’s statement to continue easing with yield curve control (YCC).
Japan’s currency weakened about 1 per cent against the dollar to the 135.30 level, while 10-year government bond yields slumped below 0.4 per cent. Japanese bank shares retreated.
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“This result certainly fits closer to what the market was expecting in terms of echoing patience and restraint,” said John Bromhead, strategist at Australia & New Zealand Banking Group in Sydney. “Today’s meeting will put pressure on dollar-yen shorts, which have been a little crowded.”
Still, the intention to drop guidance on rates, as other global central banks have done, and the call for a policy review indicate Ueda’s intention to get the ball rolling under his leadership even if he spurned the chance to make a regime-change start like his predecessor Haruhiko Kuroda.
“The result means Ueda will stay on the path set by Kuroda for a while. The BOJ won’t likely change its monetary easing framework in major ways while the review is being conducted over one and a half years,” said economist Takeshi Minami at Norinchukin Research Institute. “Meanwhile, they can still respond to developments in the economy and prices by adjusting the operation of the yield curve control.”
Around a quarter of polled economists had seen BOJ updating its guidance at this meeting while making clear its intention to stick with easing.
Many of them cited the inclusion of reference to Covid-19 in the guidance that seemed out of step with the current recovery from the pandemic and a looming decision by Prime Minister Fumio Kishida’s government to downgrade the virus to the same status as flu.
By also ditching the explicit possibility of cutting short and long-term rates, Ueda likely secured the central bank more room for manoeuvre going forward. The reassurance that YCC would continue likely served to offset the possible hawkish interpretation of the move, as Ueda, the originator of forward guidance at the BOJ decades ago, looked to revise it without upending markets.
“If the BOJ remained too constrained by the yield target in its forward guidance, it could have made it difficult to make adjustments going forward,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. The removal of the rates guidance has increased BOJ’s scope for flexibility, she said.
The review of monetary policy over recent decades will take place over a year to a year-and-a-half. The longer time frame comes in sharp contrast with past assessments that were conducted over just a few months and fuelled speculation of looming policy change.
Surveyed analysts had seen June as the most likely month for Ueda to call for a review of policy.
While some economists saw the review time as likely to push back policy change, others drew different conclusions.
“By saying the review will take a year or more, the BOJ is suggesting little link between policy and its results,” said Takahiro Sekido, chief Japan strategist at MUFG Bank in Tokyo and a former BOJ official. “Depending on inflation, the BOJ could shift towards normalisation before the review finishes.”
In a new quarterly outlook report, BOJ projected core prices to rise just 1.6 per cent in fiscal 2025, a forecast that largely supports the bank’s view that it has yet to achieve lasting 2 per cent inflation. Economists had flagged ahead of the decision that any figure showing 2 per cent or more would have fuelled speculation of policy adjustment.
The BOJ also said the risks to that inflation view in fiscal 2025 are skewed to the downside, another element that suggested the bank would not be rushing to change policy even if it is now better placed to do so.
For now, market players interpreted the decision as largely more supportive of stimulus than expected, as indicated by the currency and bond moves. Trader focus will now shift stateside to next week’s Fed meeting.
“With Fed meetings coming up, the BOJ’s comfort with a weaker yen could once again be tested,” said Aninda Mitra, head of Asia Macro & Investment Strategy at BNY Mellon in Singapore. “We wouldn’t be surprised to see the yen to go toward 140 per dollar in coming days and weeks.” BLOOMBERG
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