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Tokyo (AFP) – The Bank of Japan left its ultra-loose monetary policy on Wednesday, contrary to some analysts’ expectations, which led to a decline in the value of the yen against the dollar and the euro.
The Bank of Japan kept its short-term negative rate at -0.1% and did not raise the yield ceiling for 10-year Japanese treasury bonds, after surprisingly raising it last month to 0.5%, which revived speculations of imminent monetary tightening.
The Bank of Japan stressed in December that this adjustment was only intended to correct distortions in the Japanese public debt market due to its own policies, and should not be interpreted as the beginning of monetary tightening.
However, many investors questioned this justification and speculated about a rapid normalization of the central bank’s monetary policy, which would be more favorable to yen-denominated financial assets.
This forced the Bank of Japan to increase the purchase of Japanese government bonds. Despite his efforts, its 10-year yield has crossed the 0.5% red line several times in recent days.
“We believe that yield curve control is working,” said Bank of Japan Governor Haruhiko Kuroda, Wednesday during a press conference, and that this tool is “viable” in the long term.
He also considered that it was too early for the December amendment to bear fruit, and that it was “unnecessary” to increase again the ten-year yield ceiling that the Central Bank supported.
Inflation will slow in 2023
The monetary establishment slightly raised its inflation forecast for Japan for the current fiscal year 2022/23 (which ends on March 31) to 3 percent from 2.9 percent previously, but did not change its forecast for 2023/24, set at 1.6 percent.
It also raised its inflation forecast for 2024/25 to 1.8 percent from 1.6 percent previously.
But these new expectations remain short of the BoJ’s target of a steady 2% rate increase, the core of its decade-old loose monetary policy.
“Currently, we cannot predict when this goal will be achieved in a stable and sustainable manner,” Kuroda said.
And behind the rise in consumer prices in the Japanese archipelago were mainly external factors last year: the rise in global energy and food prices due to the war in Ukraine and international sanctions against Russia, while the prospects for growth and increase in wages in Japan remain limited.
The Bank of Japan also slightly cut its forecast for Japanese GDP growth in 2022/203 (1.9% vs. 2% previously). It also lowered its forecast for 2023/24 (1.7% vs. 1.9% previously) and for 2024/25 (1.1% vs. 1.5%).
change his approach
In the foreign exchange market, the dollar rose 1.6 percent against the yen to 130.17 yen at around 08:00 GMT, after rising above 131 yen in the wake of the Bank of Japan’s announcements. The euro strengthened against the Japanese currency at 141.14 yen (+2%).
The decline of the yen contributed to the improvement of the Tokyo Stock Exchange on Wednesday, as this trend is favorable for the value of Japanese exports, and the main Nikkei index closed up by 2.5%.
As for the Japanese government bond yields for ten years, they fell to 0.42% at around 08:00 GMT, while they rose above 0.5% before the announcements issued by the Bank of Japan.
But many observers believe that the Bank of Japan will be under pressure to change its approach.
Takahidi Kiyoshi, an economist at the Nomura Research Institute and former senior official at the Bank of Japan, predicted that “speculation will continue” this year as Kuroda concludes in early April his second and final term at the helm of the Bank of Japan.
A note by Oxford Economics stated that “the Japanese central bank will continue to actively intervene in the Japanese government bond market in the coming quarters, but a slowdown in inflation coupled with a slowdown in global bond yields would gradually ease pressure” in the second half of 2023.
© 2023 AFP