Bank of Japan maintains status quo at -0.1%; Cuts inflation forecast for 2024

Earlier today, the Bank of Japan (BoJ) concluded its first two-day policy meeting of 2024.

Despite inflation surpassing the 2% target for 21 consecutive months, the BoJ agreed to unanimously maintain its ultraloose short-term policy rate at -0.1%.

The Bank was expected to retain its policy given that policy was not tightened even when inflation was even higher.

Today’s policy decision comes as markets have been watchful for any indications that the current macroeconomic picture would lead to a possible pivot.

In terms of yield curve control, the BoJ has continued its commitment to maintaining 10-year government bond yields around 0% ‘without setting an upper limit.’

As was the case previously, the BoJ will ‘regard the upper bound of 1.0 percent for 10-year JGB yields as a reference in market operations’; and will continue with its large-scale purchasing program of assets.

In late 2022, the BoJ had taken steps to strengthen a depreciating yen by intervening to directly control bond yields.

The USDJPY has been weak as policymakers in Japan have continued to commit to a negative rate policy, while other central banks have been grappling with elevated inflation since early-to-mid 2022 and have considerably tightened monetary policy.

Higher rates in other parts of the world, especially in the US, trigger capital flows and weaken the domestic currency in the international market.

The BoJ re-iterated that there remain,

…extremely high uncertainties surrounding economies and financial markets at home and abroad…will patiently continue with monetary easing…

Inflation and wage growth

CPI inflation reached its lowest level since the middle of June 2022, coming in at 2.3% YoY in December 2023, marking an 18-month low.

There are concerns about the sustainability of the target level of inflation as consumer price rises stay elevated, which may eventually force the BoJ to increase its tolerance level.

Yet, the latest wage data has been disappointing, contracting by 3% YoY late last year, delaying any change in policy direction.

Governor Ueda and other policymakers are closely following wage talks between corporations and labour unions with fresh agreements expected to be in place in mid-March 2024, and has emphasized the importance of ‘sustained wage increases.’

The BOJ is believed to be watching the annual round of wage talks between businesses and major labor unions, with agreements expected around mid-March. BOJ Gov. Kazuo Ueda said in December that “it is crucial that the wage round will produce results conducive to sustained wage increases.”

Forecast

In a just released quarterly projection, the BoJ downwardly revised consumer inflation (except fresh food) from 2.8% to 2.4% for the reporting year starting in April 2024.

For 2025, this has been marked higher from 1.7% to 1.8%.

Analysts at TradingEconomics.com do not expect any further changes in the interest rate by the end of the first quarter, but project this to trend around 0.1% in 2025.

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