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BOJ holds fire on policy, warns of heightening global risks

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The Bank of Japan kept monetary policy steady on Thursday, preferring to save its dwindling ammunition for deeper economic troubles as a darkening global growth outlook prods major central banks to drop hints of additional stimulus.

[TOKYO] The Bank of Japan kept monetary policy steady on Thursday, preferring to save its dwindling ammunition, as a darkening global growth outlook prompts other major central banks to drop hints of additional stimulus.

But the BOJ stressed anew that global risks were heightening, such as a rising tide of protectionism and uncertainty on how US economic policies will affect financial markets.

BOJ Governor Haruhiko Kuroda may use his post-meeting briefing to signal the central bank’s resolve to ease monetary policy further if global woes threaten to derail the economy’s moderate expansion.

As widely expected, the BOJ maintained its short-term rate target at -0.1 per cent and a pledge to guide 10-year government bond yields around zero percent. It also kept intact a loose pledge to buy government bonds so the balance of its holdings increase by roughly 80 trillion yen (S$1.0 billion) per year.

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

Central banks across the globe are tilting towards easing as the escalating US-China trade war adds pressure on the slowing world economy, putting the BOJ under pressure to respond as well to growing risks to Japan’s recovery.

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. European Central Bank President Mario Draghi has also signaled the chance of more easing if inflation remains out of reach from the bank’s target.

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

Japan’s economy expanded by an annualised 2.1 per cent in January-March 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% target, despite years of massive and 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 June 5-17 said the BOJ’s next step would be to ease even further.