Bank of Japan defies wave of inflation-fighting hikes by keeping rates low

Bank of Japan Governor Haruhiko Kuroda has underlined his determination to keep interest rates low even if it means a weaker yen after the bank’s latest price forecast left the door open for continued speculation about the change in policy.
The BoJ is the latest to hold rates among major developed economies after the European Central Bank raised its deposit rate for the first time in 11 years yesterday, hours after Kuroda’s speech.
Recent fears that the global economy is in danger of a hard landing as central banks rush to fight inflation has helped ease market pressure on the BoJ, with fewer speculative bets against the yen and Japanese bonds.
This left Kuroda the option to continue with a short-term interest rate of -0.1% and a cap of 0.25% on 10-year yields, although this combination contributes to yen weakness.
“We have no intention of raising rates as part of yield curve control,” Kuroda told a news conference following the bank’s latest move. “We also have no intention of widening the 0.25% range either side of the return target. At present, we must continue to pursue monetary easing tenaciously.
He also pointed to the futility of trying to use a marginal rate hike to influence the exchange rate, citing the example of the weakening Korean won, despite several rate hikes.
“If you really wanted to stop yen weakness just with rate hikes, you would need big hikes and they would be very damaging to the economy,” he added.
His comments helped the yen weaken slightly against the dollar. But economists were divided on whether he could really contain the change.
Tension between the BoJ’s policy stance and market bets should pick up in earnest if global recession fears ease.
“While the BoJ has given no signs of heading for a tightening anytime soon, its new inflation forecast is stronger than the market’s view,” said Nobuyasu Atago, chief economist at Ichiyoshi Securities Co and a former head of the price statistics division at the BoJ.
“It’s somewhat confusing because the BoJ needs to know that by releasing these higher forecasts, speculation about the policy change won’t go away,” he added.
The BoJ now forecasts average inflation of 2.3% for the year ending March. It’s still a far cry from some of the runaway price growth overseas, but it’s the first time the BoJ has expected price gains above its 2% target level for the year. ongoing, except for the impact of sales tax increases.
He then sees the momentum slowing down, justifying further easing to achieve sustainable inflation. His view that the recovery will be slower than expected this year also supports this thesis and partly highlights the impact of lockdowns in China and the likely impact on consumption of higher energy and food prices.
“It should be noted that Kuroda said it would take massive rate hikes to stop the yen weakness and this is a sign that he has no intention of addressing it,” said strategist Keisuke Tsuruta. bondholder at Mitsubishi UFJ Morgan Stanley Securities Co. no policy changes for some time.
To some observers, however, the combination of a favorable price forecast and an unfavorable growth view looks like a typical central bank hedge to keep its options open. If the global economy were to avoid a major slowdown, then prices could continue to grow at a healthy pace.
The bank should learn from the Reserve Bank of Australia’s experience of waiting too long to hit an inflation target, according to Tim Baker, head of macro research at Deutsche Bank AG in Sydney.
“Both the RBA and the BoJ have spent many years underpricing the target and risk remaining dovish for too long simply because they want to be sure that inflation is truly rising in a sustainable way.”
A prolonged attack by speculators in the bond market Down Under and a surge in inflation led the RBA to abruptly abandon its experiment in yield curve control late last year, an outcome the BoJ is well aware of. conscious.
Japan’s central bank said it would continue to offer to buy fixed-rate bonds on a daily basis, underscoring its determination to protect its own YCC framework if not the yen. Just last month, it was forced to buy a record amount of bonds to defend its yield cap.
It was the first political meeting since the shocking murder of former Prime Minister Shinzo Abe, which picked Kuroda to run the bank and made him the BoJ’s longest-serving governor.
Some economists, including Hiroaki Muto of Sumitomo Life Insurance, say the death may have strengthened Kuroda’s resolve to stick with easing as he seeks to continue the legacy of the Abenomics he was in. a key player.
Prime Minister Fumio Kishida’s strong victory in a key national election earlier this month has also removed a potential source of pressure for change for the time being.

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