The Bank of Japan (BOJ) yesterday kept its monetary policy unchanged, avoiding a repetition of the market meltdown that followed its July rate hike while keeping the path open for continuing to raise borrowing costs in the coming months.
The immediate market reaction was muted, with stocks maintaining their gains and only a relatively small shift in the value of the yen after the BOJ met expectations by holding the unsecured overnight call rate steady at 0.25 percent. Following BOJ Governor Kazuo Ueda’s news conference, where he seemed to suggest there was a little more time to pause, the yen weakened from about ￥141.80 to ￥143.60 against the US dollar.
In a busy week for central banking that saw the US Federal Reserve finally embark on rate cuts, the BOJ was expected to stand pat by all economists surveyed by Bloomberg.
Photo: Bloomberg
“The upside risk to prices does appear to be easing given the recent yen strength,” Ueda said.
“There’s some time to confirm certain points when making policy decisions,” he added, referring to the importance of checking moves in financial markets and the state of overseas economies.
A hold decision seemed almost certain given the need to monitor the impact of July’s rate increase and to avoid spooking markets again with a surprise. Holding steady also kept the bank out of the spotlight as Japan’s Liberal Democratic Party chooses a new leader on Friday next week to take on the role of prime minister.
The bank raised its assessment of consumer spending, a key engine of economic growth, and cited the need to monitor financial markets. Following another uptick in the inflation rate, it also reiterated that it expects price growth to continue in line with its target for the latter half of its projection period.
“The BOJ is indicating it’s on track for another rate hike,” said Jin Kenzaki, head of Japan research at Societe Generale SA.
Most economists doubt that the central bank would hike at its meeting next month, partly due to the possibility of a national vote in Japan just before the US chooses its next president in early November.
“October seems too early given the likelihood of not enough data to back up an additional hike and a general election likely taking place soon after the LDP election,” Kenzaki said.
“I continue to expect that the next move will take place in December,” he said.
Market pricing indicates investors are less convinced than economists that the central bank would move again by the end of the year. Overnight index swaps, which tend to be volatile, yesterday veered between suggesting zero and 77 percent odds of a 25 basis-point hike this year. About 70 percent of economists surveyed by Bloomberg expect another increase by December.
The BOJ removed from its policy statement a mention of its stance on continuing to raise the policy rate if its outlook for economic activity is met. The bank previously used this language in an explanation of its rate hike decision and policy direction in July. While the removal of the line matched the pattern of explanatory text in recent statements, its earlier repeated inclusion might have overemphasized the BOJ’s appetite to hike.
“Ueda will probably balance two main considerations — the risk that a hawkish BOJ sets off more market turbulence, against growing confidence backed by recent data on wages and prices that its 2 percent inflation target is increasingly secure. Our baseline view is that Ueda will send a subtle signal that the BOJ will be prepared to hike in October, if conditions are right then,” Bloomberg economist Taro Kimura said.
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