The Bank of Japan left its ultraloose monetary policy untouched on Friday, with new Gov. Kazuo Ueda sticking to his cautious stance on making tweaks or changing course.
The second two-day policy meeting under Ueda did not produce any unexpected moves.
But in a news conference after the meeting, Ueda hinted there may be surprises going forward when it comes to its "yield curve control" (YCC) program, saying that in order to deal with the changing economic environment, “a certain degree of surprise may be unavoidable.”
Ueda has stressed the importance of communication with markets, but it is difficult to give forewarning of tweaks to the YCC program to allow wider long-term rate swings or plans to terminate the program entirely. Such announcements would trigger a massive selling of Japanese government bonds (JGBs) by investors and could cause long-term rates to skyrocket, so YCC policy changes will likely need to be made without prior notice.
For now, the central bank maintained its monetary stimulus, which includes the YCC program, of purchasing unlimited amounts of 10-year JGBs to keep yields at around 0% while also setting the short-term interest rate at minus 0.1%.
The BOJ also did not change the range of acceptable fluctuations of 10-year JGB yields — currently set at plus and minus 50 basis points.
Since he took the helm of the central bank in April, Ueda has said the BOJ will tenaciously continue its aggressive easing — which was initiated a decade ago by his predecessor, Haruhiko Kuroda — until the bank realizes its goal of 2% inflation occurring in a stable and sustainable manner.
Inflation has been at a historically high level, with consumer prices excluding volatile fresh food reaching over 2% for the past year or so. But the BOJ has said current inflation is mainly being driven by higher energy and commodities prices stemming from the Russia-Ukraine war.
A weaker yen due to the growing interest rate gap between the BOJ and the vast majority of its peers has fueled inflation as well, with the Japanese central bank trodding its current path virtually alone.
On Wednesday, the U.S. Federal Reserve paused its rate hike campaign to fend off rising inflation, but indicated that it would still raise interest rates twice this year, which could further widen the interest rate gap and push down the yen’s value.
The following day, the European Central Bank raised its key interest rates by 25 basis points and also indicated that another hike is coming next month to combat inflation.
“(The BOJ’s decision) has again shown a stark contrast with the monetary policy of foreign central banks,” said Tsuyoshi Ueno, senior economist at NLI Research Institute.
Because Ueda’s nomination as BOJ governor came as a surprise, speculation had grown that he might seek to swiftly change course on monetary policy.
But since being named to the post, Ueda has repeatedly stressed the need to continue Kuroda’s monetary stimulus and cautiously observe the situation with the 2% inflation goal in mind. Many economists are now predicting that the normalization of monetary policy will not take place any time soon.
“There have been some changes in the price and wage-setting behavior of companies,” Ueda said during the Friday news conference.
In the past, “even if they had wanted to raise prices, they would have held back due to concerns that other companies in the same industry would not raise their prices. The same was true for wages. But we are beginning to see some changes, as companies will not be able to secure workers if they don’t raise wages.
“Still, how long this will continue is highly uncertain,” he added. “We would like to collect more data and information to deepen our analysis.”
In April, Ueda had warned that tightening the monetary stimulus prematurely and missing the 2% target poses a greater risk to the economy than delayed tightening.
The NLI Research Institute’s Ueno said the hurdle to achieve the BOJ’s stable and sustainable 2% inflation goal backed by a healthy cycle of wage hikes is actually very high, given that it is uncertain whether Japanese firms will maintain an average wage increase of over 2%.
“It’s not an easy task, so I think it could take quite a while to normalize the monetary policy,” he said.
In the meantime, Ueda may introduce policy tweaks to mitigate some side effects of the decadelong ultraloose easing, including changes to the YCC program within this year.
This is because the Fed will likely enter a rate cut phase next year, meaning the BOJ’s moves to tweak policies could “push up the yen’s value more than expected and push down stock prices,” Ueno said.
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