The Bank of Japan (BOJ) is to review its assessment of prices and the economy at its meeting next month, spurring speculation it could ease further then, but stopped short of following the US Federal Reserve in adding to its monetary stimulus immediately.
The BOJ yesterday said that it needed to pay closer attention to the possibility of losing momentum toward its 2 percent inflation target as overseas economies continue to decelerate.
Slowing global growth has prompted the Fed and the European Central Bank to cut rates in a fresh wave of easing that the BOJ has so far resisted.
The BOJ is more positive toward adding stimulus than it was at its last meeting, but price momentum is not being lost and there is no need for big changes in its policy framework for now, BOJ Governor Haruhiko Kuroda told a news conference.
A change to the negative interest rate is one option for additional easing, but the BOJ does not have any priority regarding its choices, Kuroda said.
While a majority of economists correctly forecast the central bank’s steady stance, some predicted a move lower.
The yen strengthened after the BOJ’s decision, but then reversed course and was trading at 107.87 to the US dollar after Kuroda spoke.
Even before yesterday’s call for a review, an increasing number of economists — 83 percent in the latest Bloomberg survey — have said that the next policy step is likely to be additional stimulus.
Fundamental challenges remain for the world’s third-biggest economy. Inflation stood at 0.6 percent in July, far from the BOJ’s 2 percent target, and exports have declined every month this year.
A sales tax hike taking effect next month is expected to hit domestic demand, which has helped sustain growth during the export slump.
On the international front, there is a lot that could change between now and the BOJ’s next policy review.
The US and China are set to resume high-level trade talks and investors are on edge over any potential retaliatory action after Saudi Arabia said drone attacks that took out about 5 percent of global oil production were sponsored by Iran.
A weakening in the yen in the past few weeks likely helped give Kuroda room to hold off acting for at least a while longer.
Another headache for the BOJ’s policy operation has eased for now. Japan’s 10-year government bond yield is back trading within the central bank’s target range after touching a three-year low of minus-0.295 percent.
Kuroda said the BOJ would not allow yields to fall for a prolonged period, and that it was desirable for the yield curve to steepen a bit.
Long-term rates that fall too much might squeeze profit margins for pension companies and insurers, as well as affect consumer sentiment, he said.
“Under the current yield curve control, we will make necessary adjustments to [Japanese Government Bond] purchases so that the yield curve will be appropriate,” Kuroda said.
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