Outlier BOJ maintains easy policy that defies global tightening tide

The Bank of Japan expected inflation to exceed its target this year in a new forecast released Thursday, but kept interest rates ultra-low and signaled its determination to remain an outlier amid a wave of monetary policy tightening. global central banks.

The decision came hours before that of the European Central Bank, which will consider a larger-than-expected rate hike of 50 basis points to bring soaring inflation under control.

As rising fuel and commodity prices pushed Japanese inflation above its 2% target, the BOJ repeatedly said it was in no rush to withdraw its stimulus, as the slowdown in global growth darkens 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.

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

swim against the tide

In new quarterly projections, the council raised its core consumer inflation to 2.3% for the current year ending March 2023. It also raised its inflation forecast for the following year to 1 .4% against 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. .

“Inflation isn’t really rising that much in Japan (compared to other countries),” said Hiroaki Muto, an economist at Sumitomo Life Insurance.

“There is also a lack of clear evidence that a weak yen hurts the economy. The BOJ has little incentive to change its policy.”

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

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.

This impact was highlighted in data released earlier on Thursday, which showed that Japan posted a trade deficit for the 11th consecutive month in June, as imports jumped 46.1% year-on-year, due to the weakness of the yen.

Recent BOJ data 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 0 cap. .25% for the 10-year yield.

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

(Reuters)


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