Japan Interest Rate Stays Unchanged

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Economic

Summary:

Bank Of Japan keep interest rate in negative region once again.

The Bank of Japan, in its two-day meeting, opted to keep its monetary policy settings unchanged and made adjustments to its economic projections. However, it did not provide clear indications regarding the potential timing for the conclusion of the negative interest rate policy. This development led to a weakening of the yen.

As of Tuesday, the BOJ maintained the short-term rate at -0.1% and left the yield curve control parameters unchanged, as stated in their official announcement.

In its quarterly outlook report, the bank revised down its inflation forecast for the fiscal year starting in April, reducing it from 2.8% to 2.4%. This adjustment implies that the inflation rate is expected to remain above the 2% target for an extended period, a trend observed since April 2022.

The BOJ's policy decision, as anticipated by Bloomberg's surveyed BOJ watchers, unfolded as expected. Given the recent seismic event on New Year’s Day and a deepening funding scandal within Prime Minister Fumio Kishida’s ruling party, the timing for Japan's first rate hike since 2007 seemed inappropriate. By maintaining the status quo, the BOJ continues to stand out globally in terms of policy, diverging from the Federal Reserve and European Central Bank, which are hinting at potential rate cuts later this year.

Following the announcement, the yen experienced a decline against the dollar, briefly reaching 148.55 per dollar as market participants factored in the likelihood of the negative rate persisting for an extended period.

Despite the decision to hold rates steady, it is unlikely to alter the prevailing sentiment among economists, who still anticipate a rate hike from the BOJ at some point this year. The bank expressed increasing confidence in gradually achieving its price target, signaling its commitment to the path leading to a rate hike.

Economists surveyed suggest that April is the most probable timing for the cessation of the negative rate, allowing the central bank to evaluate the outcomes of annual pay negotiations. Higher wages are considered crucial for establishing a positive cycle of increasing prices and wages, contributing to economic growth.

Ahead of the Tuesday meeting, sources revealed that BOJ officials believed their price projections, around 2% or higher, justified ending the negative rate. Their current focus is on whether the outlook's certainty will increase sufficiently.

Governor Kazuo Ueda is scheduled to address reporters in the afternoon, likely from 3:30 p.m. Given the recent yen depreciation, Ueda is expected to avoid sounding too dovish, as a yen around 150 keeps import costs high and adds to inflationary pressures, posing a potential threat to already weakened consumer spending. Faced with rising living costs, households are growing impatient with the prolonged monetary easing, especially as a key price measure stays above the BOJ’s 2% target.

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Japan Interest Rate Stays Unchanged

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