BOJ to keep rates ultra-low and hold fire until global outlook is clearer

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan is expected to maintain ultra-low interest rates and dovish guidance next week, signaling its determination to hold off on withdrawing stimulus until it sees clearly that the economy can withstand the slowdown in global growth.

The decision will follow the U.S. Federal Reserve’s latest interest rate hike on Wednesday and cement the BOJ’s status as a dovish outlier as a flurry of counterparties continues to tighten monetary policy to combat soaring global warming. ‘inflation.

As Japan’s economy is just beginning to recover from the pain of the coronavirus pandemic, BOJ Governor Haruhiko Kuroda has stressed the need to maintain an ultra-loose policy.

At a two-day meeting ending Tuesday, Dec. 20, the BOJ is expected to maintain a -0.1% target for short-term rates and a 0% cap for the 10-year bond yield, both set below its yield curve. control policy (YCC).

Investors are focusing on Kuroda’s post-meeting briefing for clues about the policy outlook. Markets are rife with speculation that the BOJ will adjust its policy when Kuroda’s second five-year term ends in April.

“While the BOJ is unlikely to change policy next week, markets will be looking for any changes in how the bank describes the price outlook as inflation could remain around its 2% target until the end of the month. next year,” said Izuru Kato, chief economist. at Totan Research.

“If the U.S. economy avoids a deep recession and the Japanese economy is in reasonably good shape, the BOJ could remove its yield cap around June or July next year,” he said.

With inflation above target and the prospect of higher wages, BOJ officials are already starting to drop signs of a possible YCC move next year.

The BOJ should review its monetary policy framework and adjust its massive stimulus package after reviewing the results of a round of wage talks next year, board member Naoki Tamura told the Asahi daily, showing growing attention to the downsides of a protracted easy policy.

The idea has been embraced by some members of the central bank, according to three sources familiar with his thinking.

Although BOJ officials are not ruling out the possibility of a policy adjustment next year, they are in no rush as an expected drop in global growth weighs on exports, the sources said.

Many BOJ members also prefer to look at the outcome of wage negotiations, known as “shunto,” to determine how quickly the central bank can phase out stimulus, they say. The shunto talks will take place between blue chip companies and unions around March.

“If wage growth proves strong, then the BOJ will assess whether that strength can be sustained,” one of the sources said, expressing a view echoed by two others.

CONTENT WITH STATUS QUO

Amid uncertainty over the global outlook and the pace of wage increases in Japan, the BOJ is content to maintain the status quo for now, the sources said.

Japan’s core consumer prices in October were 3.6% higher than a year earlier, beating the BOJ’s inflation target for a seventh consecutive month and dragged down by soaring fuel costs and raw materials.

The BOJ expects the inflation rate to slow below its target next year as cost pressures dissipate.

But some analysts expect core consumer inflation to top 4% in the coming months and stay around 2% for most of next year as businesses continue to pass on the rising costs to households.

A Teikoku Databank survey conducted in November showed that major food and beverage makers planned to raise prices on more than 4,000 items next year, with increases concentrated in February.

The hope of policymakers is that wages will rise enough next year to compensate households for the rising cost of living, helping to turn cost-driven inflation into demand-driven inflation.

Any chance of a BOJ policy adjustment will disappear if the Fed fails to rein in inflation without pushing the US economy into a deep recession, analysts said.

“There is a chance that Japanese inflation will continue to accelerate for longer than expected next year,” said Yoshiki Shinke, chief economist at the Dai-ichi Life Research Institute in Tokyo.

“But the BOJ will likely struggle to phase out stimulus if the global economy is in bad shape,” he said.

(Reporting by Leika Kihara; Editing by Bradley Perrett)

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