BOJ maintains accommodative policy, Kuroda avoids possibility of short-term rate hike

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan forecast inflation to exceed its target this year in a new forecast released on Thursday, but kept interest rates ultra-low and signaled its determination to remain an outlier in a wave tightening of global central bank policy.

BOJ Governor Haruhiko Kuroda dismissed the possibility of policy tightening in the near term, saying he had “absolutely no plan” to raise interest rates or raise an implicit ceiling from 0 .25% set for the bank’s 10-year bond yield target.

“The economy is recovering from the pandemic. Deteriorating terms of trade in Japan are also causing an outflow of income,” Kuroda told a news conference.

“As such, we need to continue our easy policy to ensure that rising corporate earnings lead to moderate wage and price growth,” he said.

As widely expected, the BOJ maintained its target of -0.1% for short rates and that of 10-year bond yields around 0%.

The BOJ’s dovish language stands out in a recent wave of central bank interest rate hikes to combat soaring inflation. The European Central Bank is expected to follow suit on Thursday with its first rate hike in 11 years.

As rising fuel and commodity prices pushed Japanese inflation above the BOJ’s 2% target, it has repeatedly said it is in no rush to withdraw its measures. stimulus, as slowing global growth clouds the outlook for a still-weak economy.

“Uncertainty surrounding the Japanese economy is very high. We need to be alert to movements in financial markets and currencies, and their impact on the economy and prices,” the BOJ said in a quarterly report released. after the decision.

Underscoring its concern over recent sharp falls in the yen, the BOJ included a rare warning in the report that “high volatility” in the currency market was among the risks to the Japanese economy.

SWIMMING AGAINST TIDE

In new quarterly projections, the council raised its forecast for core consumer inflation for the current year ending March 2023 to 2.3% from 1.9%. It also raised its inflation forecast for the following year to 1.4% from 1.1%.

But the BOJ cut the growth forecast for this fiscal year to 2.4% from 2.9% and warned of the potential hit from continued supply constraints, rising commodity prices and the pandemic. of COVID-19.

Nodding to a flurry of companies raising prices, the BOJ said inflation expectations were rising and were expected to rise further, including through wage increases.

In a statement released after the decision, the BOJ left unchanged a pledge to step up stimulus if needed and to keep interest rates at “current or lower” levels to support growth.

However, swimming against the tide of the global wave of monetary tightening is not without cost. The policy divergence pushed the Japanese yen to its lowest level in 24 years, hurting households and retailers by increasing already rising import costs.

While warning that recent sharp falls in the yen were “undesirable”, Kuroda ruled out the possibility of using rate hikes to slow the currency’s slide.

“I don’t think a small rate hike can stop the yen from falling,” Kuroda said. “If we were to stop the fall of the yen with rate hikes, we would have to raise rates significantly. This would inflict enormous damage on the economy,” he added.

Kuroda also described the BOJ’s huge bond purchase in June as a temporary but necessary step to defend his yield cap against speculative trading.

Recent data from the BOJ showed the central bank was forced to gobble up a record 16 trillion yen ($116 billion) of Japanese government bonds (JGBs) in June to defend its yield cap of 0.25%.

The aggressive buying pushed the BOJ’s ownership of the bond market to more than 50%, reversing past efforts to gradually reduce its huge balance sheet and causing stress in the futures market.

“Letting interest rates exceed our target, just to protect the functioning of the market, would defeat our purpose of maintaining loose monetary policy,” Kuroda said.

($1 = 138.0000 yen)

(Reporting by Leika Kihara; Additional reporting by Tetsushi Kajimoto, Daniel Leussink and Kantaro Komiya; Editing by Shri Navaratnam, Sam Holmes and Kim Coghill)

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