The Japanese national flag flies outside the Bank of Japan headquarters, in Tokyo, on April 28.KAZUHIRO NOGI/AFP/Getty Images
The Bank of Japan (BOJ) kept ultralow interest rates on Friday but announced a plan to review its past monetary policy moves, laying the groundwork for new Governor Kazuo Ueda to gradually phase out his predecessor’s massive stimulus program.
While maintaining its commitment to “patiently” keep policy accommodative, the central bank removed a pledge from its guidance for interest rates to stay at “current or lower levels” in a move that gives it more leeway for a future policy tweak.
Ueda’s debut policy meeting marked a cautious start for the 71-year-old governor who took office this month, leaving room for him to make future changes but sending a signal to markets that he would be in no rush to do so.
In a news conference, the new chief said the broad-based review won’t be tied to near-term policy shifts and stressed the need to wait for more evidence to conclude inflation would sustainably achieve the BOJ’s 2 per cent target.
“While trend inflation is gradually heightening, it will take some time to achieve our inflation target,” Ueda said after the BOJ’s widely-expected decision to make no changes to its yield curve control (YCC) policy.
“The risk of missing our price target with premature monetary tightening is bigger than the risk of experiencing inflation exceeding 2 per cent due to a delayed tightening. The cost of waiting for trend inflation to heighten is low,” he said.
The yen tumbled, and Japanese bonds and stocks rallied on expectations the BOJ’s new governor would take his time to withdraw the stimulus of his dovish predecessor, Haruhiko Kuroda, who retired this month after a decade at the helm.
“The fact that the BOJ left a reference to further easing as needed confirmed its stance to continue monetary easing,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.
At its two-day meeting, the BOJ kept unchanged its YCC policy that sets a short-term interest rate target of –0.1 per cent and that for the 10-year bond yield around zero.
Some analysts saw the BOJ getting some breathing space with the 10-year yield having fallen below its 0.5 per cent cap, thanks in part to a decline in U.S. Treasury yields on expectations the Federal Reserve will soon pause its interest rate hike cycle.
“The Fed and the U.S. economy are bailing them out from doing something right away, buying them some time. It doesn’t mean we get no change to YCC for the next one to 1-1/2 years,” said Jim Leaviss, CIO of public fixed income at M&G in Tokyo.
The BOJ will spend one to one-and-half years on the review, which will look into various unconventional monetary steps taken over the past 25 years during Japan’s battle with deflation and low inflation, Ueda said.
The idea was to use lessons learned from the review in guiding policy during his five-year term, Ueda said, though he added that the BOJ could always change policy before concluding the review.
There is uncertainty on how soon the BOJ may end ultra-easy policy, as it weighs emerging signs of wage growth against lingering headwinds from slowing global growth.
In fresh quarterly projections released in a report issued on Friday, the board revised up its core consumer inflation to 1.8 per cent in the current year ending in March 2024, and 2.0 per cent in the following year.
Under previous projections made in January, the BOJ expected inflation to hit 1.6 per cent this year and 1.8 per cent in fiscal 2024.
But the BOJ projected inflation to slow to 1.6 per cent in fiscal 2025 and said risks to that price outlook were skewed to the downside, highlighting a lack of conviction among central bank policy-makers on the durability of price growth.
“Our forecasts show that we’re getting quite close to achieving (our price target). But we’re not quite confident about our longer-term inflation forecast,” Ueda said.
The growing side-effects of YCC, such as market distortions caused by the BOJ’s huge bond buying and the strain on bank profits from ultralow interest rates, also complicate the timing of an exit, analysts say.
Ueda said the BOJ must be vigilant to such side-effects, even as it keeps monetary policy ultra-loose.
“It’s true we’re seeing side-effects here and there. We need to closely scrutinize these developments,” he said. “We must avoid getting the balance of benefits and costs wrong, so will be vigilant and disclose information as much as possible.”