Japan: Bank of Japan keeps rates unchanged at June meeting despite yen falling to 24-year low
At its meeting ending on 17 June, 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.
The combination of medium-run inflation forecasts remaining below target and an uncertain economic outlook pushed the BoJ to retain its monetary policy stance. The BoJ’s continued dovishness contrasted with the increasing hawkishness of central banks in other developed countries, causing the yen to fall to a 24-year low following the BoJ’s decision. The Bank stood pat due to Japan’s low inflation rate. Inflation breached the BoJ’s 2.0% target in April for the first time in seven years, mostly due to rising commodity prices on global markets. Inflation should fall ahead as wage growth remains subdued and commodity prices cool throughout 2022–2023; the BoJ forecasts 1.1% inflation in FY 2023. Moreover, it sees “extremely high” risks to economic growth due to uncertainty regarding the Covid-19 pandemic, the war in Ukraine, and commodity prices.
The BoJ maintained its dovish tone in its communiqué, again stating that it is “closely monitoring the impact of Covid-19 [and the BoJ] 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”. That said, in this meeting’s release the BoJ added that it will “pay due attention” to the effects of foreign exchange market fluctuations on Japan’s economic activity and prices. In the same vein, Governor Haruhiko Koruda changed his prior positive stance towards a depreciating yen, and now said that a weaker yen is negative for the economy. Thus, further depreciation of the yen could push the BoJ to tighten its monetary policy.
On the potential form that monetary policy tightening could take this year, analysts at Nomura commented:
“[Potential] changes to policy would likely be limited to a change in the target range for fluctuation in long-term interest rates not directly linked to the 2.0% price stability target, rather than any change to the yield curve control framework tied to sustainable achievement of the price stability target. Considering that the Kishida administration still enjoys high approval ratings, it seems unlikely that it would pressure the BoJ for political reasons. We see the probability of policy changes by the end of 2022 at around 10%.”
Regarding future policy moves, Ma Tieying, economist at DBS, commented:
“Unlike other major economies, Japan is not facing serious inflation pressure. […] The BoJ may want to guide rates higher only after seeing a notable rise in wage growth and improvement in the long-term price dynamics, in our view.”
The next monetary policy meeting is set to take place on 20–21 July.