As expected, Japan’s central bank kept its ultra-loose monetary policy unchanged at its final policy meeting of the year, citing “extremely high uncertainties” in the world’s third-largest economy, pushing any potential unwinding into the new year.
The Bank of Japan voted unanimously to keep interest rates at -0.1%, while maintaining its yield curve control policy, which keeps the upper limit of the 10-year Japanese government bond yield at 1% as a reference.
“Given the extremely high uncertainties surrounding the economy and financial markets at home and abroad, the Bank will patiently continue with monetary easing while responding nimbly to developments in economic activity and prices as well as financial conditions,” the BOJ said in a policy statement on Tuesday.
The Japanese yen weakened after the BOJ’s decision, trading at around 143.5 against the dollar in midday trading, while the Nikkei 225 stock index rose 1%. Japanese 10-year government bond yields were little changed.
With the Bank of Japan’s potential exit from ultra-loose monetary policy challenged by a slowing economy and cooling inflation, most economists do not expect Governor Kazuo Ueda to make any changes until next year, when the annual spring wage negotiations confirm a trend of meaningful wage increases.
Ueda is due to meet with the press in Tokyo later on Tuesday, where he may give a preview of the BOJ’s future course of action.
Comments from Ueda in early December had raised expectations of a change in monetary policy, sparking a rally in the yen. The BOJ has been cautious about unwinding its long-standing ultra-loose monetary policy, wary that any premature move could jeopardise recent nascent improvements.
Inflation outlookOn Friday, the Bank of Japan also said it expects core inflation – which it defines as inflation excluding food prices – to remain above 2% until fiscal 2024. Despite core inflation exceeding its stated 2% target for 19 consecutive months, the BOJ has “patiently continued” its super-accommodative monetary policy.
So-called “core inflation” – inflation excluding food and energy prices – has now exceeded the BOJ’s 2% target for 13 consecutive months.
The BOJ prefers inflation to be driven by domestic demand, which is more sustainable and stable. The bank believes that wage increases would lead to a more meaningful spiral, encouraging consumers to spend.
Japan’s main labour union, Rengo, said in October that it would demand wage increases of at least 5% in next year’s spring wage negotiations. The union won the biggest pay rise in three decades at this year’s talks in March.
The BOJ’s monetary policy is complex and multifaceted because of the various quantitative easing tools it has used to reflate the world’s third-largest economy over the past three decades.
Its super-easy stance also makes it an outlier at a time when other major central banks have been raising interest rates to combat stubbornly high inflation. This policy divergence is partly responsible for the pressure on the Japanese yen and government bonds.
