Bank of Japan Upholds Accommodative Policy Amidst Fragile Economic Recovery

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Bank of Japan Upholds Accommodative Policy Amidst Fragile Economic Recovery

In a strategic move to stimulate increased lending and foster economic revival, the Bank of Japan (BOJ) has opted to sustain short-term interest rates at -0.1%. The central bank has, however, emphasized its commitment to closely monitor wage and price dynamics before contemplating any shift in its monetary policy.


As widely predicted by financial markets, policymakers have unanimously chosen to maintain the existing interest rates. Moreover, they have affirmed their dedication to purchasing government bonds without imposing any ceiling. This measure is designed to keep the yield on a 10-year bond hovering near zero percent, with an upper limit of one percent.


Despite inflation currently surpassing the BOJ’s 2% target, it remains notably lower compared to other nations. Moreover, wage growth has not kept up with price rises, which presents difficulties for a long-term economic recovery.


Projections indicate that inflation, excluding food, is expected to persist around 2% until 2024, primarily due to past increases in import costs reflecting on consumer prices. However, as these factors wane, inflation is forecasted to decelerate. The BOJ anticipates that with a positive output gap and an uptick in medium- to long-term inflation expectations and wage growth, underlying inflation will gradually approach the 2% price stability target.


While acknowledging a moderate economic recovery, the central bank has highlighted the impact of the global economic slowdown on exports and industrial production. Public and housing investments have lagged, but corporate profitability, labor markets, and company fixed investments have witnessed improvement.


Given the substantial uncertainties in both domestic and international economies, the BOJ asserts it will persist with patient monetary easing, agilely responding to economic and price developments, along with financial conditions. The ultimate aim is to achieve a sustainable and stable 2% inflation accompanied by wage increases.


In Tokyo, the BOJ’s decision to maintain ultra-loose policy settings came as no surprise, preserving substantial monetary stimulus until additional data becomes available. Notably, the central bank refrained from altering its dovish policy advice, dashing hopes among traders that negative interest rates might soon come to an end.


Governor Kazuo Ueda observed positive trends in prices and wages, indicating potential steady wage increases in 2024. However, he urged caution, emphasizing the need to scrutinize whether a cycle of positive wage inflation will materialize.


The yield on 10-year government bonds has remained at approximately 0%, while the BOJ has stuck to its target rates for short-term interest rates at -0.1%. The pledge to raise stimulation “without hesitation” if necessary does not alter.


Following the decision to postpone stimulus reduction, the yen depreciated, and Japanese markets experienced an upturn. While over 80% of economists surveyed anticipate the BOJ terminating its negative rate policy in 2024, uncertainty persists regarding the exact timing. Ueda refrained from providing a clear indication, stating that the decision is contingent on various factors and not influenced by the actions of the US Federal Reserve.


Since assuming office, Ueda has gradually loosened the BOJ’s hold on long-term rates to counter the excessive stimulus from his predecessor. Market expectations suggest that short-term rates rise from the current -0.1% to approximately zero in the near future.


Economists caution that if wage increases fail to offset growing inflation, consumption, already on the decline, could worsen. Despite real wages, adjusted for inflation, still decreasing, the BOJ remains optimistic about the economy’s gradual recovery and asserts its readiness to normalize ultra-easy policy once a trend of rising real wages becomes apparent.


As the BOJ prepares to release quarterly outlook reports in January and April, analysts speculate that these moments may provide suitable opportunities for policy adjustments. However, the complex global economic landscape, marked by other central banks signaling a halt to interest rate hikes, could complicate the decision-making process for the BOJ.


Although Japan is getting closer to its price target, Yasunari Ueno, chief market economist at Mizuho Securities, says that Ueda wants to retain flexibility in determining when to exit. Stefan Angrick, a senior economist at Moody’s Analytics, predicts an abandonment of the negative interest rate policy in April, aligning with the onset of pay negotiations.


Nevertheless, Angrick emphasizes the challenges of significant rate hikes given the fragile state of the economy, a strengthening yen, slowing inflation, and the global trend of
central banks reducing rates.


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