The Bank of Japan (BOJ) refrained from expanding monetary stimulus ahead of the UK vote on Brexit next week that could roil global markets, and before a domestic election in which the political opposition has made the bank’s negative interest-rate policy an issue.
With the yen soaring to its strongest in almost two years after the decision yesterday, BOJ Governor Haruhiko Kuroda reiterated in a news conference in Tokyo that the central bank would not hesitate to take action if needed.
He also said the central bank was carefully monitoring moves in financial markets and was in touch with counterparts, including the Bank of England, amid Brexit concerns that he said had had an impact in the bond market. Japan’s bond yields slid to a record low amid demand for haven assets.
Kuroda also reiterated his expectation for inflation to hit policymakers’ 2 percent target as forecast in the fiscal year through March 2018. He said Japan’s economy continues to expand gradually and cited solid plans for business investment. Even so, he added that it is possible that excessive gains in Japan’s exchange rate could affect prices.
“Speaking of the strengthening yen, we think that it is not favorable that the yen rises and volatility increases without reflecting economic fundamentals,” Kuroda said after the yen climbed through 104 per US dollar for the first time since 2014. “We want to carefully watch and pay attention to the international financial market, including the foreign exchange.”
The BOJ earlier held its key interest rate at minus-0.1 percent and kept the annual target for expanding the monetary base at 80 trillion yen (US$764 billion). By holding off on further expansion now, Kuroda can better consider the path of US monetary policy, watch the impact of Britain’s vote and see the outcome of a Japanese upper house election on July 10.
“The BOJ will have to take bold action to arrest the strengthening yen, and if it tries something in line with what it did before, there will be disappointment,” Norinchukin Research Institute chief economist Takeshi Minami said. “With the Brexit vote ahead, the BOJ could not move this time, because the result on June 23 may erase the impact of whatever it did now.”
The yen has now surged more than 15 percent this year, even with the introduction of negative rates. The TOAX closed down 2.8 percent.
If the UK votes for Brexit, the Japanese currency might gain as much as 6 yen per US dollar and the Nikkei 225 Stock Average could drop by 3,000, according to a report by Mizuho Research Institute earlier this month.
The BOJ’s immediate outlook for inflation deteriorated, something that is sure to reinforce expectations for board members to trim their projections when they update these at next month’s meeting.
Yesterday’s statement said the year-on-year change in consumer prices is “likely to be slightly negative or about zero percent for the time being.”
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