Japan defies wave of inflation-fighting hikes by keeping rates at rock bottom
THE Bank of Japan (BOJ) left its rock-bottom interest rates unchanged on Thursday (Jul 21) as it put concern over the economy ahead of any potential implications for the yen for now, further cementing its outlier stance compared with inflation-fighting central banks overseas.
Supporting its view that the recovering economy needs continued support even as the impact of the pandemic softens, the BOJ lowered its economic growth forecast for this year.
At the same time, though, it raised its price forecast for this year by more than expected, a sign that Japan too is not immune to inflationary pressure.
The economic downgrade follows lockdowns in China and a jump in Covid cases at home since the last quarterly projections. The global outlook has also darkened as much stronger inflation abroad fuels recession fears exacerbated by the continued war in Ukraine.
The BOJ's concern over the growth trajectory is linked to its view that a solid recovery is necessary to help make inflation sustainable. While it raised its price forecasts for the current fiscal year to show inflation averaging 2.3 per cent for the year ending in March, it sees that momentum slowing in the 12 months that follow.
With the stand-pat decision, governor Haruhiko Kuroda is continuing to hunker down on stimulus despite a wave of interest-rate hikes by his peers as they try to rein in much stronger price growth.
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The European Central Bank is poised to raise borrowing costs later Thursday to leave the BOJ as the sole remaining dove among major central banks in developed economies.
"The BOJ concluded that while they see some companies passing price pressures on to consumers, the momentum still isn't there to keep inflation above 2 per cent in a sustainable manner," said Harumi Taguchi, principal economist at S&P Global Market Intelligence. "For that to happen, wages will have to keep up with price gains."
The BOJ's continued holding pattern and its bias toward further easing show it is still prepared to risk a further weakening of the yen and renewed attacks on its yield cap as it pursues its goal of steady growth with sustainable inflation.
The central bank has gained some breathing space to hold firm on stimulus after concerns over the global economy eased some of the pressure on the yen and 10-year yields.
Just last month the BOJ was forced to buy a record amount of bonds to defend its yield ceiling. The central bank said it would continue to offer to buy an unlimited amount of bonds at a fixed rate on a daily basis.
Japan's currency was largely unchanged around 138.37 against the dollar having fluctuated immediately after the BOJ decision. It set a fresh 24-year low of 139.39 last week.
"It seems we are past the stage where the yen is prone to drop further simply based on US-Japan rate differences," Taguchi said. "The market's focus is shifting to the economic slowdown, especially in the US."
This was the first policy meeting since the shocking murder of former Prime Minister Shinzo Abe who handpicked Kuroda to lead the bank and enabled him to become the longest serving BOJ governor.
Some economists including Hiroaki Muto at Sumitomo Life Insurance say the death may have firmed up Kuroda's determination to stick with easing as he looks to continue the legacy of Abenomics in which he has been a key player.
Prime Minister Fumio Kishida's strong victory in a key national election earlier this month has also removed for the time being a potential source of pressure for change. The result showed scant public support for alternative policy approaches as the government continues to offer subsidies that alleviate household pain caused by the higher cost of living.
That has left Kuroda with scope to continue with a short-term interest rate of -0.1 per cent and a 0.25 per cent cap on the bank's 10-year yield target even though this combination is contributing to yen weakness that adds inflationary pressure.
The yen is not far from the 140 level against the dollar that would likely reignite speculation of possible currency intervention by the government, even if the likelihood of such action may still be limited.
The central bank continues to be extremely wary of moving too quickly to raise rates and hitting the economy as it has done in the past.
In another sign of cautiousness, the BOJ didn't mention its special pandemic funding measures due to end in September. Instead, it will take the rare step of leaving until the last minute a decision on whether to continue the programme or let it expire.
Meanwhile, Kuroda and his board argue that even as price growth picks up in Japan, it is based on cost-push factors that will fade. The bank's 2.3 per cent inflation forecast for fiscal 2022 is the first time the bank has expected price gains above its target level of 2 per cent in the current year barring the impact of sales tax hikes.
Still, a sharp slowdown in the following year shows the BOJ's unchanged view that this pace of growth isn't sustainable.
While central bankers around the globe have had to pivot rapidly from their earlier views that the current inflation is transient, the BOJ continues to argue that price dynamics in Japan are very different from those overseas.
The entrenched reluctance of Japanese firms to raise prices out of fear of losing consumers continues to keep price growth limited outside a relatively narrow range of items including energy and processed food, the bank argues. BLOOMBERG
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