The Bank of Japan kept monetary policy unchanged at its meeting today as it decided to continue assessing the impact of its massive asset purchase program and negative interest rates. The BoJ’s decision to hold policy steady comes despite the yen appreciating by 12% against the US dollar so far this year and inflation falling back to negative in recent months.
In its statement, the Bank said Japan’s economy should continue on a “moderate expanding trend” as household and corporate spending offset the current sluggishness in exports. Inflation in the near-term is expected to be “slightly negative or about 0%”.
The yen rose sharply after the central bank’s decision, having managed to fall back yesterday after a brief surge following the US Federal Reserve’s decision hours earlier to keep its rates steady. The dollar plunged to a 22-month low of 103.54 yen earlier today before recovering back above 104 yen in mid-European session. The euro and the pound also touched fresh more than three-year lows of 116.70 and 146.37 yen respectively.
Uncertainty about the pace of US monetary tightening, slowing growth in emerging market economies and the EU referendum in the UK have increased the appeal of the Japanese currency in recent months, which is considered as a safe-haven due to Japan being a net creditor. The yen’s appreciation has complicated the job of BoJ policymakers as a stronger exchange rate makes it more difficult for the central bank to meet its inflation target by lowering the price of imported goods. It also makes Japanese goods more expensive abroad and this has weighed on Japanese stocks. The Nikkei 225 share index suffered a 3% drop today due to the yen’s sharp gains against all major currencies. The index has fallen about 19% in the year-to-date.
Although there were little expectations for the Bank to announce any changes to its policy in June, most economists are with the view that further easing is on the cards in July when the BoJ will publish its latest outlook report. The Bank is likely to downgrade its growth and inflation projections when it meets on July 28-29, prompting it to expand its stimulus program. In April, the BoJ pushed back the timing of when it expects to hit its inflation target for the fourth time in a year. A further delay in the projected timing that is not accompanied by looser policy could risk damaging the Bank’s credibility.
A July easing would also help in weakening the yen if it convinces traders that the Bank is committed to meeting its inflation target at the earliest. This would take the pressure off Japan’s finance ministry, which has repeatedly warned of intervening in the currency markets if the yen rises too rapidly. Today’s jump in the yen’s value triggered another fresh warning by a senior government official who cautioned markets against “one-sided” moves. In the meantime, there was little indication by BoJ Governor Haruhiko in today’s press conference of a possible move in July apart from the usual rhetoric on the negative consequences of a yen appreciation.
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