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BOJ leaves policy unchanged ahead of expected Federal Reserve rate cut

[TOKYO] The Bank of Japan kept its monetary policy unchanged, 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 its interest rate pledge unchanged. Roughly a third of economists had expected the BOJ to strengthen its commitment to keeping interest rates extremely low.

Amid growing expectations that it will need to increase stimulus, the BOJ's decision likely reflects policy makers' hopes that additional stimulus by the Fed and European Central Bank may already be largely priced into the yen's exchange rate.

"There isn't much need for the BOJ to use its limited cards for additional easing now," Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities, said before today's decision. A US rate cut is already factored into markets so the risk of quick appreciation in the yen isn't high, she said.

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In updated quarterly forecasts, the BOJ 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.

The BOJ has cut at least one of its inflation forecasts every quarter since April last year, though they have remained higher than those of private economists.

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 signaled 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.

FED'S NEXT

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.

It is that scenario that had economists predicting the BOJ's next move would be to add stimulus. 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.

Governor Haruhiko Kuroda told Bloomberg in June that big stimulus moves are still possible, though some measures would be needed to mitigate side effects. Cutting interest rates and increasing asset purchases are among the options, he said.

Mr Kuroda will hold a news conference starting at 3.30pm in Tokyo.

BLOOMBERG