Bank of Japan Maintains Ultra-Loose Policy and Leaves Rates Unchanged
Japan’s central bank, the Bank of Japan, decided to maintain its ultra-loose monetary policy and keep interest rates unchanged in light of the “extremely high uncertainties” surrounding both domestic and global economic growth. The bank’s decision, announced in a policy statement after its September meeting, was widely expected and involves maintaining short-term interest rates at -0.1% and capping the 10-year Japanese government bond yield around zero.
The Bank of Japan stated that it would continue with monetary easing, while closely monitoring economic activity, prices, and financial conditions. This move comes after the bank’s previous policy meeting in July, where it loosened its yield curve control to allow longer-term rates to align more closely with rising inflation.
Gradual Departure from Yield Curve Control
The Bank of Japan’s decision to broaden the permissible range for 10-year Japanese government bond yields was seen as a step toward departing from the yield curve control policy implemented by Governor Kazuo Ueda’s predecessor. This change has led many economists to predict an earlier exit from the bank’s ultra-loose monetary policy, potentially in the first half of 2024.
In a recent interview, Ueda mentioned that the Bank of Japan could have enough data by the end of this year to determine when it could end negative rates. However, the bank remains cautious due to concerns about sustainable inflation, which requires meaningful wage growth to support household consumption and economic growth.
Sustainable Inflation and Economic Growth
Despite core inflation consistently exceeding the Bank of Japan’s 2% target for 17 consecutive months, officials are hesitant to exit the policy. The bank believes sustainable inflation is contingent upon meaningful wage growth and a positive chain effect that stimulates household consumption and economic expansion.
Core inflation, which excludes volatile fresh food prices, reached 3.1% in August, aligning with the Bank of Japan’s projections. The factors prioritized by the bank as meaningful inflation drivers include wage growth, the output gap, and price expectations.
Experts suggest that Japan has a significant opportunity to transition from a deflationary environment to a more inflationary one that is sustainable. However, the key factor in this transition is substantial and consistent wage inflation, which can have a psychological impact on consumption. It remains to be seen whether this will lead to a virtuous cycle for economic growth.
Challenges and Considerations
Prematurely raising interest rates may hinder economic growth, while delaying tightening policies excessively could further weigh on the Japanese yen and increase the risks of financial instability. Moreover, any delay in tightening policies puts additional pressure on Japanese Prime Minister Fumio Kishida, who pledged to support consumers facing rising living costs and ensure Japan emerges meaningfully from deflation with wage growth that consistently outpaces inflation.
Japan’s gross domestic product growth for the April-June quarter was revised down to an annualized 4.8% due to weak capital spending. Although the output gap increased by 0.4% in the second quarter, marking the first increase in 15 quarters, policymakers face challenges due to uneven domestic economic data and an uncertain global economic outlook.
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