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Bank of Japan governor Kazuo Ueda said he has “yet to foresee” inflation settling at the target level of 2 per cent, deferring market expectations that the central bank was nearing an exit from decades of ultra-loose monetary policy and sending the yen tumbling.
Ueda’s comments on Friday followed the BoJ’s announcement that it would maintain its easing stance, including the world’s only negative interest rates, at the conclusion of a two-day monetary policy committee meeting.
“We have yet to foresee inflation stably and sustainably achieve our target and that is why we have to patiently maintain ultra-loose monetary policy,” Ueda told a press conference. He added that the BoJ would naturally shift once it was able to see the inflation target achieved.
The BOJ’s announcement triggered an immediate sell-off in the yen, which dropped to ¥148 per dollar within minutes.
While the decision was widely anticipated, markets were closely watching Ueda’s comments on inflation as Japan confronts persistent rising prices for the first time in decades. Official data released earlier on Friday showed consumer price growth had exceeded the 2 per cent target for 17 straight months.
The yen had traded choppily ahead of Friday’s decision as investors bet on widening interest rate divergence between the hawkish US Federal Reserve and the still-dovish Japanese central bank. The Fed this week held its benchmark rate at 5.25-5.5 per cent, a 22-year high, and signalled that borrowing costs would remain elevated.
The BoJ kept short-term interest rates at minus 0.1 per cent and maintained its yield curve control programme, which limits returns on the benchmark 10-year Japanese government bond within a tight band around a target of zero.
The central bank in July allowed that band to widen to 1 per cent, prompting markets to slowly push yields higher. The 10-year JGB yield this week reached 0.72 per cent, its highest level since January 2014. But it made no adjustment to the YCC on Friday.
Expectations are growing that Japanese authorities will intervene if the yen continues to fall too far or too fast, particularly past the ¥150 mark. During Ueda’s press conference, the currency slid to more than ¥148.30 per dollar.
Hirofumi Suzuki, chief foreign exchange strategist at Sumitomo Mitsui Banking, said if the yen continued to weaken, last year’s low of ¥152 could be in sight.
“Of course, there is no way that the BoJ will respond to the weakening yen by raising interest rates or other monetary policy measures, but it will be interesting to see how much caution the BoJ takes with regard to the current financial markets,” said Suzuki.
Prime Minister Fumio Kishida on Friday pledged to remain vigilant to currency moves, reiterating assurances a day earlier by chief cabinet secretary Hirokazu Matsuno not to rule out any options to curtail volatility.
The complexity of the BoJ’s position in the coming months was underlined by the August inflation data. The “core” index, which excludes volatile fresh food prices, expanded 3.1 per cent year on year in August, the same rate as in July.
But “core-core” inflation, which also strips out energy and is closely followed by the BoJ for underlying inflationary trends, was 4.3 per cent in August — also matching July’s figure and demonstrating the persistence of price growth above the target.
“We expect inflation to ease from here, but the pace of deceleration will be slow as past producer price increases are fed through to consumers,” Stefan Angrick, senior economist at Moody’s Analytics, wrote in a note. “All of this complicates the picture for monetary policy.”
Source: Economy - ft.com
