Mount Fuji, Japan

Japan Monetary Policy April 2022

Japan: Bank of Japan keeps rates unchanged at April meeting

At its meeting ending on 28 April, the Bank of Japan (BoJ) kept its policy rate unchanged at minus 0.10% and kept its 10-year government bond yield target at 0.00%, as widely expected by the market. In order to reach the target, the BoJ commits to purchasing an unlimited number of government bonds as part of its “yield curve control” policy. However, in a surprise to the market, the Bank doubled down on its government bond yield target by committing to daily purchases of bonds should they prove necessary, causing the yen to fall to its lowest level in 20 years.

The move sharply contrasted those of Japan’s G7 peers, who have either strongly hinted at or already begun to normalize monetary policy. Meanwhile, core inflation continued to increase in March, with the BoJ’s forecasts for inflation in FY 2022 increasing by 0.8 percentage points to 1.9%—just below the central bank’s 2.0% target.

Instead, the BoJ’s decision was based on a lack of demand-driven inflation. Recent inflation has been driven largely by transient cost-push factors such as the recent rise in oil prices. The BoJ expects inflation to fall back to further below target in FY 2023 to 1.1%. It also sees risks to economic growth as skewed to the downside due to the potential for further Covid-19 outbreaks, a sudden tightening of global financial conditions, and swings in commodity prices. The combination of medium-run inflation forecasts remaining below target and an uncertain economic outlook pushed the BoJ to retain its monetary policy stance. With his term set to end in April 2023, the upcoming fiscal year will be governor Haruhiko Kuroda’s last chance to win Japan’s more than 30-year battle with persistently low inflation.

Looking ahead, the BoJ maintained its dovish tone in its communiqué, again stating that it will “closely monitor the impact of Covid-19 and will not hesitate to take additional easing measures if necessary”, while it also “expects short- and long-term policy interest rates to remain at their present or lower levels”.

Regarding future policy moves, Min Joo Kang and Chris Turner, economists at ING, commented:

“At the press conference, Governor Haruhiko Kuroda expressed some concern over the rapid pace of Japanese yen weakness but reiterated that FX reflected the fundamentals of the economy and the weak JPY would be positive for Japan’s economy as a whole. […] The newly revised outlook report shows that the CPI (excluding fresh food) is expected to rise 1.9% in FY 2022 but move down to 1.1% in FY 2023 and 2024. With inflation below the BoJ’s target of 2.0%, the BoJ’s easing stance will remain for a considerable time.”

The next monetary policy meeting is set to take place on 16–17 June.

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