The headquarters of the Bank of Japan (BOJ) seen behind cherry blossoms in Tokyo, March 20, 2023.
Kazuhiro Legs | AFP | Getty’s paintings
Bank of Japan left interest rates unchanged in the course of the first political meeting of newly appointed governor Kazuo Ueda.
The decision was in step with economists’ expectations of no change within the benchmark interest rate, which has remained at -0.1% because the central bank cut rates below zero in 2016.
The central bank also kept the tolerance range for 10-year Japanese government bonds unchanged at 50 basis points above and below the 0% goal.
In December, the central bank shocked the world’s bond markets by unexpectedly widening its tolerance band 10-year Japanese government bonds from 25 basis points to 50 basis points above and below 0%.
The Japanese yen it weakened by about 0.8% to 134.75 against the US dollar after the announcement. performance on 10 years of JGB decreased barely to 0.425%.
Rules review ahead
Keeping its current policy, the Bank of Japan said it had “decided to conduct a broad-based review” of its mitigation measures.
The central bank said the planned timeframe for the review is around 1 to 1.5 years.
“Achieving price stability has been a challenge for a long period of 25 years,” the central bank said, adding that its monetary easing policy “interacted with and affected wide areas of Japanese economic activity, prices and the financial sector.”
In a separate perspectivethe central bank projects inflation for all items excluding fresh food and energy to be around 2.5% in fiscal 12 months 2023 and between 1.5% and a couple of% in 2024-2025.
Ueda has previously stressed that inflation must be “fairly strong and shut to 2%” – the central bank’s goal – before making any adjustments to its yield curve control policy.
Abandon YCC?
Despite market expectations that the central bank would further expand the yield curve control tolerance band or abandon this system altogether, the central bank maintained its current policy.
“The bank will proceed to QQE (Quantitative and qualitative easing of monetary policy) with yield curve control, pursuing the worth stability objective for as long as vital to take care of that objective in a stable manner.
He added that the central bank “is not going to hesitate to take additional mitigating measures if vital.”
Amy Xie Patrick, head of income strategy at asset management firm Pendal, predicts the central bank will ditch YCC somewhat than broaden its tolerance.
“I feel the following step they may take regarding YCC can be to resign. However the solution to do this have to be to make the markets realize that it’s more about their concern concerning the functioning of the markets than about inflation running away,” Xie Patrick told “Street Signs Asia” on CNBC.
Inflation still above goal
Inflation within the Japanese capital rose in April, in keeping with government data released on Friday ahead of the BOJ decision.
The Japanese capital’s consumer price index rose 3.5% in April, beating the three.2% growth forecast in a Reuters survey. This figure can be barely higher than the three.2% reading in March.
Excluding fresh food and energy, Tokyo’s consumer price index rose 2.3% in April – barely above the central bank’s inflation goal of around 2%. Tokyo’s inflation is a leading indicator of the nationwide trend. The nationwide core CPI in Japan was 3.1% in March.
Meanwhile, Japan’s unemployment rate rose to 2.8% in March from 2.6% in February, government data showed. That is greater than Reuters forecast of 2.5% and marks the very best reading since January 2022.
The national ratio of jobs to applicants was 1.32, below Reuters’ estimate of 1.34.
One other uncertainty lies ahead
“Some uncertainty stays in Japan’s real economy, but at the identical time, inflationary pressures have gotten increasingly imminent,” Hiromi Yamaoka, a former Bank of Japan official and current head of the Future Institute of Research, told CNBC Asia’s “Squawk Box” on Friday before the announcement.
“It’s a tough situation, however the BOJ must listen to cost stability as the central bank’s primary focus,” Yamaoka said, but added that the central bank must focus more on increased inflationary pressures than on the true economy.
To reconcile the 2, Yamaoka said that “they can not proceed with the present emergency intervention within the JGB market.”