Kazuo Ueda announced a comprehensive review of the Bank of Japan’s monetary policy in his first board meeting as governor but held off on changes to its ultra-loose stance as he played down the risks from rising inflation.
Ueda became the first academic to take the helm of Japan’s central bank this year as consumer prices in the country hit a multi-decade high, fuelling investor expectations that he would gradually unwind radical policy tools deployed over the past decade to lift the economy out of deflation.
The 71-year-old economist played it safe by maintaining the central bank’s policy on Friday but left room for changes in the coming months, with the BoJ forecasting Japan’s inflation was likely to remain close to its 2 per cent target in the next two fiscal years.
The yen weakened to its lowest point in six weeks, falling as much as 1.1 per cent to ¥135.45 per dollar on Friday, as investors bet on a continued dovish stance after Ueda opted not to revise the BoJ’s policy of capping rates on the benchmark 10-year Japanese government bond at about zero per cent. The Topix stock index rose 1.2 per cent.
The BoJ held overnight interest rates at minus 0.1 per cent. It maintained its yield curve control policy, saying it would continue to allow 10-year bond yields to fluctuate by 0.5 percentage points above or below its target of zero.
In its policy statement, however, the central bank dropped a part of its forward guidance on rates, which previously said it “expects short- and long-term policy interest rates to remain at their present or lower levels”.
The removal of this clause could make it easier for the BoJ to scrap its yield curve control in the future.
“The removal of forward guidance . . . points to the possibility that a change in the Bank’s yield control curve policy could actually come far more quickly in coming months,” Benjamin Shatil, a foreign exchange strategist at JPMorgan.
In its economic outlook report, also released on Friday, the BoJ stuck to its forecast that core consumer prices excluding fresh food would fall below its 2 per cent target this year.
The core consumer price index rose at a rate of 3.1 per cent in March from a year earlier, but the bank said it expected price rises of 2 per cent in the 2024 fiscal year, instead of its previous forecast of 1.8 per cent. It also expects 1.6 per cent inflation in the 2025 fiscal year.
“With extremely high uncertainties surrounding economies and financial markets at home and abroad, the Bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions,” it said.
Stripping out fresh food and energy prices, the BoJ said it forecast consumer prices to rise 1.8 per cent in the year through March 2026.
According to UBS chief Japan economist Masamichi Adachi, the latest inflation forecast allows the BoJ to buy time and flexibility in its policy direction.
“The message the BoJ is trying to send is that the inflation trend is rising and preparations for policy change are under way,” Adachi said, adding that the broader policy review, which will take place over 18 months, would not bind the BoJ from making near-term changes to its easing measures.
Additional reporting by Hudson Lockett in Hong Kong
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