Kazuo Ueda announced a sweeping review of the Bank of Japan’s monetary policy at its first board meeting as governor, but held off on changes to its ultra-loose stance as it downplayed the risks of rising inflation.
Ueda became the first academic to head the Bank of Japan this year as consumer prices in the country reached multi-decade highs, leading to investor expectations that he would gradually untie the radical policy tools deployed over the past decade to drive the economy out of the economy. deflation.
The 71-year-old economist played it safe by maintaining central bank policy on Friday, but left room for changes in the coming months, with the Bank of Japan forecasting Japanese inflation to remain close to its 2 percent target in the next two fiscal years. years.
The yen weakened to a six-week low, falling 1.1 percent to 135.45 yen per dollar on Friday, as investors bet on a continued dovish stance after Ueda chose not to review the Bank of Japan’s policy of capping interest rates on the index 10. – Japanese government bonds for the year at around zero percent. The Topix stock index rose 1.2 percent.
The Bank of Japan kept the overnight rate at -0.1 percent. It maintained a policy of yield curve control, saying it would continue to allow 10-year bond yields to fluctuate 0.5 percentage points above or below its target of zero.
However, in its policy statement, the central bank dropped part of its forward guidance on interest rates, which previously said it “expects both short- and long-term interest rates to remain at their current or lower levels.”
Omitting this provision may make it easier for the Bank of Japan to relinquish control of the yield curve in the future.
“Removing forward guidance . . . . Benjamin Chatel, foreign exchange strategist at JPMorgan, points to the possibility that a change in the bank’s yield control curve policy could actually come much more quickly in the coming months.
In its Economic Outlook report, also released on Friday, the Bank of Japan stuck to its expectation that core consumer prices excluding fresh food will fall below the 2 percent target this year.
The core consumer price index increased by 3.1 percent in March from a year earlier, but the bank said it expects prices to rise 2 percent in fiscal 2024, instead of its previous forecast of 1.8 percent. It also expects inflation of 1.6 percent in fiscal 2025.
“With heightened uncertainties surrounding economies and financial markets at home and abroad, the Bank will patiently continue monetary easing while responding smoothly to developments in economic activity and prices as well as financial conditions,” the bank said.
Excluding fresh food and energy prices, the Bank of Japan said it expects consumer prices to rise 1.8 percent in the year to March 2026.
According to UBS Chief Japanese Economist Masamichi Adachi, the latest inflation forecasts allow the Bank of Japan to buy time and flexibility in its policy direction.
“The message the BoJ is trying to send is that the inflation trend is picking up and preparations are underway for a policy change,” Adachi said, adding that the broader policy review, which will take place over 18 months, will not oblige the BoJ to make near-term changes in easing measures.
Additional reporting by Hudson Lockett in Hong Kong