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The Central Bank of Japan keeps negative interest rates

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The Central Bank of Japan has stood by ultra-low interest rates, defending persistent market speculation that it will adjust its policy as it continues to expect inflation to fall below 2% next year.

Thus, BoJ Governor Haruhiko Kuroda and his board left the negative interest rate, 10-year yield ceiling and asset purchases unchanged at the end of the two-day policy meeting on Friday. The result was in line with the expectations of all 49 economists surveyed by Bloomberg.

The Japanese yen saw modest fluctuations in both directions after the decision, but was little changed on the day near 146.25 per dollar. The currency is up nearly 4% from its three-decade low last week, prompting more suspected intervention from Japan.

In its quarterly economic forecast, the Bank of Japan sharply raised its inflation forecast to 2.9% for the year ending in March while expecting price growth to slow to 1.6%, well below its 2% target in the following 12 months.

Figures released earlier today showed inflation in Tokyo hit the fastest pace since the late 1980s in October, up 3.4%. But the Bank of Japan still sees the acceleration as unsustainable.

Kuroda continues to hold its ground as the last pillar of low global rates just a day after the European Central Bank raised interest rates again.

But the governor is walking a tightrope as his pessimistic stance risks putting more downward pressure on the Japanese yen despite the billions of dollars the government has spent to prop up the currency.

The decision preserves Japan’s anomalous position on politics and inflation. The Bank of Japan is defying the external tide of interest rate hikes while Prime Minister Fumio Kishida’s government is supporting the yen and ramping up spending to mitigate the effects of higher food and energy prices, inflated in part by a weaker currency.

Kishida continues to support Kuroda’s campaign to achieve lasting growth in prices and the economy through the increasing wage cycle. The Japanese prime minister announced an economic package of about $200 billion to ease the pain of cost-push inflation earlier on Friday, with details expected later in the day.

However, a draft plan obtained by Bloomberg earlier this week shows that the government also expects the Bank of Japan to monitor the impact of volatility in financial markets, a sign that Kuroda cannot ignore how the bank’s actions and comments could affect the yen.

Focus now turns to Kuroda’s press briefing from 3:30 p.m. With memories still fresh from last month when Kuroda’s cautious comments caused the Yen to weaken sharply. Finance Minister Shunichi Suzuki made the first Japanese intervention to prop up the yen in 24 years, barely half an hour after the governor finished speaking.

Since then, Japan is believed to have entered the markets again to support the currency without confirming this.

A short-term defense of the yen is unlikely to reverse the downward pressure it will face as long as the Fed keeps interest rates high and widens the policy gap between the US and Japan. But suspected interventions at least give the BoJ time to approach the moment the Fed slows down.

The next meeting Kuroda and colleagues in December. By then, the global outlook may be more bleak and market dynamics have shifted in favor of the Bank of Japan, relieving pressure on yield curve and currency control.

The yen has lost more than a fifth of its value against the dollar this year 2022, the most among the major currencies, as investors focused on the policy gap with the United States.

Kuroda has repeatedly said that Japan’s slow recovery from the pandemic makes support from monetary easing necessary while wage gains must be stronger to make the current cost-push inflation sustainable. Unlike the United States, Japan has experienced long bouts of deflation in recent memory.

Under Kuroda, it has spent the past decade trying to spark a perpetual cycle of inflation and growth. As evidence of the bank’s concern about the future of the economy, it lowered its forecast for economic growth by pointing to expected headwinds from the global slowdown.

The Bank of Japan now sees the economy growing by 2% this fiscal year compared to a previous forecast of 2.4%, with a further slowdown to 1.9% the following year.

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