BOJ’s New Chief Ueda Keeps Ultra-Low Rates, Embarks on Policy Review

Reuters

18:41 JST, April 28, 2023

TOKYO (Reuters) — The Bank of Japan (BOJ) kept ultra-low interest rates on Friday but announced a plan to review its past monetary policy, laying the groundwork for new Governor Kazuo Ueda to gradually phase out his predecessor’s massive stimulus program.

While maintaining its commitment to “patiently” maintain ultra-loose policy, the central bank removed a pledge to keep interest rates at “current or lower levels” in a move that gives it more leeway for a future policy tweak.

In a news conference, Ueda said the broad-based review won’t be tied to near-term policy shifts and stressed the need to wait for more evidence to conclude inflation will sustainably achieve its 2% target.

“While trend inflation is gradually heightening, it will take some time to achieve our inflation target,” Ueda told a news conference after the BOJ’s widely-expected decision to make no changes to its yield curve control (YCC) policy.

“The risk of missing our price target with premature monetary tightening is bigger than the risk of experiencing inflation exceeding 2% due to a delayed tightening. The cost of waiting for trend inflation to heighten is low,” he said.

The yen tumbled and Japanese bonds and stocks rallied on expectations the BOJ’s new governor would be in no rush to withdraw the monetary stimulus of his dovish predecessor, Haruhiko Kuroda, who retired this month after a decade at the helm.

The BOJ will spend one to one-and-half years on the review, which will look into various unconventional monetary steps taken over the past 25 years during Japan’s battle with deflation and low inflation, Ueda said.

“The fact that the BOJ left a reference to further easing as needed confirmed its stance to continue monetary easing,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

At the two-day meeting that ended on Friday, the BOJ kept unchanged its YCC policy that sets a short-term interest rate target of -0.1% and that for the 10-year bond yield around zero.

In fresh quarterly projections released in a report issued on Friday, the board revised up its core consumer inflation to 1.8% in the current year ending in March 2024, and 2.0% in the following year.

But the BOJ projected inflation to slow to 1.6% in fiscal 2025 and said risks to that price outlook were skewed to the downside, underscoring the BOJ’s focus on keeping monetary policy loose to support the fragile economy.

Under previous projections made in January, the BOJ expected inflation to hit 1.6% this year and 1.8% in fiscal 2024.