TOKYO – The Bank of Japan (BoJ) announced a review of its longstanding monetary easing measures on Friday, but said it would maintain them for the time being in the first policy decision under new governor Kazuo Ueda.
Analysts say the central bank’s stimulus measures, which were supposed to deliver a vital boost to the Japanese economy, are looking increasingly unsustainable.
“The bank has decided to conduct a broad-perspective review of monetary policy, with a planned time frame of around one to one-and-a-half years,” a BoJ statement issued after a two-day meeting said.
In the immediate term, the institution left its negative interest rate in place and did not adjust the band in which rates for 10-year government bonds fluctuate, as expected.
Former economics professor Ueda took over this month from Haruhiko Kuroda, the architect of the bank’s signature ultra-loose strategy over the past decade.
On Friday, Ueda said the BoJ could still make tweaks to its easing policies during the review period.
“Necessary policy changes will be debated during each of the policy board meetings and if necessary, they will be implemented. That’s our stance,” he told reporters.
The governor said the review would evaluate the bank’s “non-traditional” attempts to banish the deflation that has plagued Japan since the 1990s, following the bubble era.
But moving away from monetary easing will be a tricky balancing act for Ueda, who faces pressure to normalise policy while minimising any shock to the economy.
The yen’s value has weakened since early 2022 because the BoJ has consistently bucked the global trend of aggressive interest rate hikes to battle inflation.
The bank’s 2% inflation target has been surpassed every month since April 2022, but it argues that price rises are linked to temporary factors such as the Ukraine war.
Ueda has previously called the BoJ’s current stance “appropriate” and warned of the risk of sudden moves, given global economic uncertainty.
After BoJ’s announcement on Friday, the yen fell to 135.65 yen against the dollar, from 133.83 in morning trade.
Inflation forecast
BoJ hiked its inflation forecasts for the current and next financial years, excluding volatile fresh food prices.
It now predicts 1.8% in 2023-24 and 2% in 2024-25, “mainly due to a higher projection for wages”. In 2025-26, the bank expects a dip in inflation to 1.6%.
Salaries have been stubbornly stagnant in Japan but there are signs they may finally be rising, with major companies including Toyota, Nintendo and Uniqlo parent Fast Retailing announcing substantial wage hikes in recent months.
Ryutaro Kono, chief economist at BNP Paribas, predicted that the central bank could drop its negative interest-rate policy towards the end of 2024 or later, when the global economy is expected to see clear recovery.
“Because long-term yields are stable globally, the BoJ under Ueda does not have to rush to make policy adjustments,” he said.
Takahide Kiuchi, executive economist of Nomura Research Institute, echoed this view, who said Friday’s decision shows that the bank does not foresee achieving its two% inflation goal.
The BoJ also lowered its growth forecast for Japan for the current financial year, to 1.4% compared with 1.7% previously.
“There are extremely high uncertainties for Japan’s economy, including developments in overseas economic activity and prices, as well as developments in the situation surrounding Ukraine and in commodity prices,” the bank warned. – AFP, April 30, 2023
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