Mount Fuji, Japan

Japan Monetary Policy January 2022

Japan: Bank of Japan keeps rates unchanged at January meeting

At its meeting ending on 18 January, the Bank of Japan (BoJ) kept its monetary policy parameters unchanged, as widely expected by market analysts. In terms of rates, the BoJ left the short-term policy rate for current accounts held by financial institutions at the Bank unchanged at minus 0.10%. It also continued to not set an upper limit on the amount of Japanese government bonds (JGBs) it will purchase in order to cap the 10-year JGB yield at around 0.00%. Regarding asset purchases, the Bank kept its buying commitments unchanged following December’s announcement that it would complete its scheduled buying commitments at the end of Q1 2022, and then gradually moderate its purchases from April 2022 onwards.

The policy decisions came amid a mild increase in price pressures, with the Bank highlighting the impact to economic activity stemming from the resurgent Covid-19 pandemic. As such, it noted that risks to the near-term outlook are skewed to the downside, and thus it felt that it had grounds to take a wait-and-see approach. Consequently, the Bank downgraded its growth outlook for economic activity for FY 2021 (April 2021–March 2022) to 2.8% (October report: +3.4%), thus signaling a further delay in Japan’s recovery. However, the Bank raised its forecast for FY 2022 sharply to 3.8% growth from 2.9% in its October report. On the price front, the BoJ sees consumer prices remaining unchanged in FY 2021, matching its previous forecast, before increasing 1.1% in FY 2022, slightly higher than the +0.9% projection from the October report.

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, Alvin Liew, senior economist at United Overseas Bank, commented:

“The policy inaction in January was in line with market expectations and does not change our monetary policy outlook for Japan. And while the inflation outlook has been upgraded, it remains a distance away from the 2% target (at least till FY 2023) while the uncertain near-term growth outlook (due to Omicron) will imply the BoJ will not be tightening anytime soon and will maintain its massive stimulus for the next few years, possibly at least until FY 2023. There is an entrenched belief that unlike its G7 peers, the BoJ has little (or no) room for normalisation and will remain in a holding pattern on policy until at least April 2023 when Governor Kuroda is scheduled to leave the BoJ.”

The next monetary policy meeting is set to end on 18 March.

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