Bank of Japan leaves monetary policy unchanged, tweaks outlook
The Bank of Japan continued to keep monetary policy steady today, after it voted 8 – 1 to keep its short-term interest rate unchanged at -0.1%, but noted that inflation expectations had remained steady, which initially saw the country's currency gain.
The move was widely expected by analysts, as was a decision to leave the 10-year yield-curve target unchanged, at 0%.
In a statement, the Bank maintained that medium-to-long term inflation expectations were set to rise as the focus of companies “gradually shift toward raising wages and prices with an improvement in the output gap continuing”.
However, contrary to their outlook last October, when they said that inflation expectations were "still in a weakening phase", this time around rate-setters in Tokyo said "inflation expectations were more or less unchanged".
That optimistic tone helped the Yen strengthen immediately following the announcement.
Japan is enjoying stronger economic growth, including improving capital expenditure and exports, but inflation remains weak.
Yet the currency later fell back against the dollar after Governor Haruhiko Kuroda, speaking at a briefing following the two-day meeting, looked to quell speculation that the Bank would pull back from its significant quantitative easing programme sooner than expected.
The Bank has long stated that it intends to maintain the programme until inflation moves sustainably above its 2% price target, but with the country's economic outlook improving, expectations had been growing that the Bank would follow the lead of other central banks and look to reverse its stance sooner than that.
It was against that backdrop that Governor Kuroda warned today that the economy still needed “persistent monetary easing” and that the Bank was "not at the point to consider an exit" from the policy.
The BoJ is targeting inflation to reach 2% by 2019.
Analysts at Pantheon Macroeconomics noted: "We think CPI inflation will soon pick up to around 1.0%.
"The change in language around inflation expectations could be a nod toward the pressure that higher inflation would place upon households dependent on fixed incomes."
To an extent, analysts at UniCredit Research appeared to concur, saying: "BoJ governor Haruhiko Kuroda emphasized the need to maintain strong monetary policy easing, indirectly leaning somewhat against recent market speculation that the bank may be considering small changes in its policy stance.
"These comments are likely to be perceived as Yen-negative (USD-JPY has rallied to above 111.10) but, as we discussed yesterday, we still think this would provide only a temporary relief to USD-JPY, given ongoing bearish dollar sentiment and still stretched yen shorts."