The Bank of Japan (BOJ) stood by its ultra-low interest rates amid fresh government support, pushing back against lingering market speculation it will adjust policy as it continues to predict inflation will cool below 2 per cent next year.
Core consumer prices in Japan's capital, a leading indicator of nationwide figures, rose 3.4 per cent in October from a year earlier.
Governor Haruhiko Kuroda and his board left their negative rate, 10-year yield cap and asset purchases unchanged at the end of a two-day policy meeting on Friday (Oct 28). The result was in line with the view of 49 economists surveyed by Bloomberg.
While the yen was broadly unchanged after the initial announcement, it started to weaken after Kuroda told reporters not to expect a rate hike anytime soon, speaking at the post-meeting press conference. An announcement of more frequent central bank buying of longer-term debt also coincided with a further bout of weakness late in the afternoon in Tokyo.
The dollar gained more than 1 per cent against the yen, pushing the Japanese currency to a level that's as weak as 147.86 per greenback. The yen slid to the lowest level in three decades last week, which triggered suspected intervention from Japan.
The BOJ decision came just hours after Prime Minister Fumio Kishida announced around US$200 billion in fresh spending that will likely help the BOJ stick with policy for longer, by alleviating some of the pain caused by soaring energy prices partly inflated by the weak yen.
Meanwhile, the rise in the Tokyo core consumer price index (CPI), which excludes volatile fresh food but includes oil costs, exceeded a median market forecast for a 3.1 per cent gain and followed a 2.8 per cent gain in September.
Inflation in the Tokyo area thus exceeded the central bank's 2 per cent target for five straight months.
In its quarterly economic projections, the BOJ sharply raised its inflation forecast to 2.9 per cent for the year ending in March while predicting price growth will slow to 1.6 per cent, well below its 2 per cent target in the following 12 months. That fits in with its view that the current acceleration of inflation is not sustainable.
Kuroda has repeatedly said the bank must maintain ultra-low interest rates on the view the recent cost-push inflation will likely prove temporary.
In September, a sharp slide in the yen following the policy statement and dovish comments by Kuroda prompted Finance Minister Shunichi Suzuki to order Japan's first entry into markets to prop up the currency in 24 years. While the governor moved the market again during Friday's briefing, his tone was more cautious and his remarks weren't preceded by falls in the currency like the previous month.
Kuroda continues to hold firm as the last anchor of low global rates, just a day after the European Central Bank went ahead with another jumbo rate hike. But the governor is walking on a tightrope as his stance risks putting further downward pressure on the yen, despite billions of dollars spent by the government to support the currency.
"The likelihood of the BOJ pivoting toward tightening is still small as Japan's inflation is not broad-based at all and is only rising about a third of the pace seen in Europe and US," said Kyohei Morita, chief Japan economist at Nomura Securities. BLOOMBERG, REUTERS