Haruhiko Kuroda, governor of the Bank of Japan (BoJ), speaks during a news conference at the central bank's headquarters in Tokyo, Japan, on Tuesday, March 15, 2016. The BOJ refrained from bolstering its record monetary stimulus as policy makers gauge the impact of the negative interest-rate strategy they adopted in January.Kiyoshi Ota/Bloomberg
The Bank of Japan will not open the stimulus taps wider or take interest rates further into negative territory, despite gloomier economic prospects. At least, not yet.
Coming in the wake of the market-rattling shift to negative interest rates at the end of January, the BoJ's decision to keep monetary policy unchanged at its latest meeting Tuesday should come as no surprise. But it likely marks only a brief respite in the central bank's continuing struggle to keep deflation at bay and resuscitate an economy that seems perpetually on the brink of recession.
The BoJ has faced a barrage of criticism for crossing ever so slightly into negative territory – the fifth central bank to opt for the once-unheard-of measure – effectively signalling it has run out of other ammunition in its efforts to shore up the government's faltering stimulus strategy, known as Abenomics. The original vote by the policy-setting committee to take the benchmark rate below zero for some reserve assets was by a thin 5-4 margin. Tuesday's decision to retain the policy was by a stronger 7-2 majority.
The bank is still evaluating the economic and market fallout from the move to levy a charge of 0.1 per cent on certain excess reserves held for commercial banks, which has been in effect since mid-February. The bank tweaked the policy slightly on Tuesday, exempting short-term funds called money reserve funds, which will now have an interest rate of zero. Institutional investors had argued the charge would hurt stock market investments.
"Over all, the impression we get from the BoJ's latest policy statement is that the central bank is already de-emphasizing negative interest rates as a policy tool, in response to its poor reception by markets and the public," HSBC said in a research note.
But bank governor Haruhiko Kuroda didn't give that impression. "The policy's effects are showing in falling benchmark lending rates and mortgage rates," Mr. Kuroda told a news conference. "They will eventually spread to the real economy and consumer prices, and people will see the policy in a positive light."
Real rates "will drop significantly, which will have a positive effect on capital and housing investment," Mr. Kuroda said.
He also noted that financial markets were "gradually regaining calm" after a period of turbulence triggered by overseas developments, which would help to bring down the value of the yen and boost domestic stock prices.
The Japanese economy contracted 1.1 per cent on an annual basis in the fourth quarter, amid slumping exports and weaker consumer spending, after climbing 1 per cent in the previous three months. Excluding fresh food, consumer prices year over year have been flat, which ensures further intervention by the central bank in its quest to meet its inflation target of 2 per cent.
The bank said in its policy statement it "will examine risks to economic activity and prices, and take additional easing measures in terms of three dimensions – quantity, quality and the interest rate – if it is judged necessary for achieving the price stability target."
That will mean expanding its already massive asset purchases, which were left unchanged this time around at ¥80-trillion ($944-billion) annually. It could also lead to a deeper plunge into negative interest rates to boost lending and spending and weaken the yen, which rose after the bank's decision to stand pat. The currency, which has gained about 6 per cent against the U.S. dollar so far this year, continues to thwart policy makers' intentions, because its safe-haven status trumps negative rates every time. Just ask the Swiss, who face similar headaches.
The key risks to Japan's economic outlook lurk overseas in both emerging and developed markets, the BoJ warned. These include "uncertainties surrounding emerging and commodity-exporting economies, particularly China." The bank is also keeping a close watch on U.S. economic developments and the effects of the Federal Reserve's "monetary policy response" – namely tightening – on global markets.
"Therefore, due attention still needs to be paid to a risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively affected," the bank said.