The Bank of Japan (BOJ) has chosen to maintain its ultra-loose monetary policy and keep interest rates unchanged, reflecting its concern over “extremely high uncertainties” in both the domestic and global economic growth outlooks.
In a policy statement following its September meeting, the BOJ confirmed that it would continue to hold short-term interest rates at -0.1% and cap the 10-year Japanese government bond yield around zero, in line with expectations.
The statement emphasized the BOJ’s commitment to patient monetary easing while closely monitoring economic developments, financial conditions, and price levels, given the prevailing uncertainties in both domestic and international economies and financial markets.
The BOJ’s decision to retain its ultra-loose monetary stance diverges significantly from the actions of many other major central banks, which have been raising interest rates to combat rising inflation in recent years.
The Japanese yen depreciated by about 0.5% against the US dollar following the BOJ’s decision, settling at approximately 148.3 yen to the dollar. This depreciation highlights the policy divergence between the BOJ and other central banks, contributing to the yen’s ongoing decline against the greenback, which has surpassed 11% this year.
Yeap Junrong, a market strategist with IG Asia in Singapore, noted that the BOJ’s stance aligns with the dovish camp, and there is little urgency for the central bank to expedite policy normalization, given the lingering uncertainty in the economic outlook.
BOJ Governor Kazuo Ueda addressed the policy decision, stating that while inflation has not significantly exceeded expectations, it also hasn’t slowed as much as anticipated. The BOJ’s commitment to ending negative interest rates and yield curve control will depend on the ability to foresee stable and sustainable 2% inflation.
The BOJ previously loosened its yield curve control policy in July, allowing longer-term rates to respond more to rising inflation. However, the central bank remains cautious about exiting its ultra-loose monetary policy, as it believes sustainable inflation requires significant wage growth, which would stimulate consumption and economic growth.
Ueda emphasized the importance of wage growth, a positive output gap, and price expectations as critical drivers of meaningful inflation. Achieving a virtuous cycle of economic growth, driven by increased wages and consumption, remains the central goal for the BOJ.
Analysts suggest that discussions around policy normalization may intensify if the yen’s depreciation continues, as it could import more inflation than desired. However, the BOJ remains focused on achieving sustainable inflation and meaningful wage growth before considering a policy pivot.
Japan’s potential shift from a deflationary environment to a more inflationary one relies heavily on future wage negotiations, with shunto negotiations between major Japanese corporations and unions expected to influence the economic landscape significantly. The outcome of these negotiations in 2024 will provide valuable insights into Japan’s inflationary trajectory.
In conclusion, the BOJ’s decision to maintain its ultra-loose monetary policy underscores its commitment to achieving sustainable inflation through meaningful wage growth and consumption. While the yen’s depreciation may exert pressure on the central bank, policymakers are prioritizing a cautious and gradual approach to policy normalization in the interest of long-term economic stability.