Bank of Japan keeps easing policies in place, reaffirming position as global outlier

The Bank of Japan retained its aggressive monetary easing policy on Thursday, ensuring it will remain a global outlier as other top economies raise interest rates in the face of soaring inflation.

In its quarterly outlook, the BOJ also bumped up its inflation forecast for fiscal 2022, which ends in March 2023, from 1.9% to 2.3% while revising down Japan’s real gross domestic product growth forecast from 2.9% to 2.4%, with the possible global economic slowdown due to rate hikes in other countries likely to impact Japan.

The decision by the central bank to keep its policy unchanged was widely expected among economists, with long-time Gov. Haruhiko Kuroda showing no sign of departure from his ultraloose monetary policy that consists of negative interest rates, yield-curve control and asset purchases.

In a news conference after the two-day meeting, Kuroda reiterated that Japan needs aggressive monetary easing to support economic recovery while aiming to realize 2% inflation in a stable and sustainable manner.

Japan’s core consumer inflation rose year-on-year for nine-straight months through May. It topped the BOJ’s 2% target in April and May, but the central bank has claimed that it climbed mainly through soaring commodity prices, which is undesirable.

The outlook report also estimates that the inflation rate in fiscal 2023 will drop to 1.4%.

“According to our outlook report, we won’t achieve the stable and sustainable 2% inflation target, so we need to continue monetary easing,” Kuroda said.

Kuroda added that the pace of wage increases is not catching up with recent price hikes, so he hopes wages will be raised “another notch.”

Amid growing frustration among consumers over rising prices stemming from soaring costs for commodities, the BOJ has been facing increasing pressure to curb its impact on the Japanese economy.

The rising prices are also backed by a fast-falling yen that has continued to aggravate concerns among the public, with its rate dropping to the ¥139 mark last week to hit a fresh 24-year low.

The yen did not move significantly on Thursday, remaining near the ¥138 level against the dollar.

The BOJ is apparently becoming more cautious on the yen’s fluctuation, noting in Thursday’s outlook report that it will closely monitor the currency’s movement. There was no mention of it in the previous report, in April.

As the weakening of the yen doesn’t appear to be letting up, it is true that “the BOJ can no longer ignore the impact of the exchange rate,” said Toru Suehiro, a senior economist at Daiwa Securities.

However, it’s unlikely that the central bank will actually shift to a hawkish policy during Kuroda’s term, which will end in April next year, unless unexpected economic fallout occurs, Suehiro said.

He added that the BOJ is probably betting that the rate hike campaign by the U.S. Federal Reserve will peak out by the end of this year, which will ease pressure on the yen.

The BOJ may also be hesitant to act, since it’s uncertain whether it can reverse the weakening trend, Suehiro said.

When a central bank rolls out a rate hike, it generally gives upward pressure on its currency. But the euro has tumbled to a 20-year low against the dollar despite the European Central Bank’s expected shift to tightening, amid fears a rate hike would further drag down the region’s economy that has already been hit by an energy crisis.

“The ECB’s case indicates that, even if the BOJ were to make moves, it wouldn’t do much” Suehiro said.

During the Thursday news conference, Kuroda pointed out that the U.S. dollar is building strength against many currencies recently.

Under such a situation, “it’s highly unlikely that implementing just a small rate hike will stop the weakening of the yen,” Kuroda said.

Still, central banks in many other countries are tightening their monetary policies in an attempt to subdue inflation.

The Fed began raising interest rates in March and has been gearing up for greater hikes, as the U.S. has struggled to cool down inflation. The U.S. consumer price index hit a fresh 40-year high of 9.1% year-on-year in June.

As the figure was unexpectedly high, some investors have speculated that the Fed will consider a historic 100 basis-point hike when it holds a policy meeting next week. The ECB, meanwhile, is expected to raise interest rates on Thursday for the first time in 11 years.

Although it remains uncertain how long the BOJ will maintain its monetary policy, the appointment of new members to the policy board may facilitate a shift to tightening.

One of the two board members who will end their five-year term this month is Goshi Kataoka, an economist who has strongly pushed for an ultraeasy monetary policy. Kataoka will be replaced by Hajime Takata, an economist who recently pointed out the side effects of BOJ’s monetary easing — sparking speculation that this might be an early sign of a policy shift.