Mount Fuji, Japan

Japan Monetary Policy September 2022

Japan: BoJ keeps rates unchanged, but intervenes in FX market for first time since 1998

At its meeting ending on 22 September, the Bank of Japan (BoJ) kept its policy rate unchanged at minus 0.10% and left its 10-year government bond yield target at 0.00%, as had been widely expected by the market. In order to reach the latter target, the BoJ committed to purchasing an unlimited number of government bonds as part of its “yield curve control” policy.

The decision was driven by medium-run inflation forecasts staying below target and the economic outlook remaining unclear. Inflation rose to 3.0% in August (July: 2.6%), above the BoJ’s 2.0% target. However, this acceleration was driven by a base effect. Wage growth remains subdued, with little prospect of strong demand-pull inflation; as a result, easing energy prices are set to cause inflation to gradually soften next year. The BoJ’s dovishness—contrasting with the Fed’s hawkishness—pushed the yen briefly above 145 per dollar, close to the peak of 148 reached in the depths of the 1998 Asian financial crisis.

However, the BoJ announced it had intervened in the FX market shortly afterward, and this intervention—the first since 1998—immediately strengthened the yen by 2.5%. The yen has since depreciated somewhat, while remaining stronger than prior to the BoJ’s last monetary policy meeting but nonetheless at some of the weakest levels in over 20 years.

The BoJ maintained a dovish tone in its forward guidance: at a press event, Governor Kuroda said the BoJ had no rate hikes planned, with subzero rates potentially lasting for two or three more years.

The FX intervention means investors can no longer see the yen as a “one way street” investment opportunity, driven by the growing policy divergence between the BoJ and the Fed, as there is risk that the BoJ could intervene a second time, causing the yen to appreciate again. Overall, our panelists see the yen appreciating to 137 yen per dollar by the end of the year, easing pressure on the BoJ to hike. With inflation set to fall below target again next year, our panelists do not see the BoJ tightening monetary policy for the foreseeable future.

Analysts at Nomura commented on the policy outlook:

“We maintain our view that the BOJ’s yield curve control policy, which is at the core of its current monetary policy, is highly likely to remain in place until end-2023. We think one key factor to watch in testing this outlook will be whether the 2023 spring wage negotiations look likely to result in wage hikes of 4–5%.”

The next monetary policy meeting is set to take place on 27–28 October.

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